Based on your previous analysis of PED from the newspaper estimating that if it raises its price from 1 chf to 1.50 chf, then the number of subscribers will fall from 50000 to 40000. If the newspaper is only interested in revenue would you recommend:

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Question restatement: The newspaper estimates that raising the price from 1 CHF to 1.50 CHF reduces subscribers from 50,000 to 40,000. If the newspaper cares only about revenue, what action is suggested?

First, compute the percentage changes to gauge elasticity. The price rises from 1.00 to 1.50 CHF, a 50% increase. The quantity demanded falls from 50,000 to 40,000, a drop of 10,000 units, which is a 20% decrease. Elasticity of demand is approximately the percentage change in quantity divided by the percentage change in price: (-20%) / (50%) = -0.4. The absolute value is less than 1, which characterizes inelastic demand.

Next, assess the revenue effect. Revenue (R) is price times quantity (P×Q). Before the change: R0 = 1 × 50,000 = 50,000 CHF. After the change: R1 = 1.50 × 40,000 = 60,000 CHF. Revenue rises by 10,000 CHF, i.e., a 20% increase. This aligns with the inelastic demand result: when demand is inelastic, increasing price tends to increase total revenue because the fall in quantity is not enough to offset the higher price.

Now consider what the question is asking: if the sole objective is revenue, raising the price is beneficial in this scenario because the measured elasticity is inelastic, leading to higher total revenue despite a reduction in subscribers.

If there were other options (which are not provided here), you would evaluate them by comparing the resulting revenue or margins, but with an inelastic demand, the intuitive takeaway is that higher prices boost revenue even if quantities fall.

Note on potential confusion: some students worry that a large price increase always reduces revenue. Here the 50% price hike caused only a 20% drop in subscribers, which is insufficient to negate the revenue gain when demand is inelastic. The critical misstep would be assuming demand is elastic or confusing the direction of revenue changes without calculating both price and quantity effects.

In summary, with an elasticity magnitude below 1 and a higher price yielding higher revenue in this calculation, the revenue-maximizing move under these estimates is to increase the price.

252_EC201 Elasticity practice 2c 2d

Based on your previous analysis of PED from the newspaper estimating that if it raises its price from 1 chf to 1.50 chf, then the number of subscribers will fall from 50000 to 40000. If the newspaper is only interested in revenue would you recommend:

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252_EC201 Elasticity practice 2c 2d

Based on your previous analysis of PED from the newspaper estimating that if it raises its price from 1 chf to 1.50 chf, then the number of subscribers will fall from 50000 to 40000. If the newspaper is only interested in revenue would you recommend:

View Explanation

Log in for full answers

Similar Questions

If a company needs to raise the prices of some its products, it should choose to raise the prices of Blank ______ products because relatively fewer customers will stop buying the product as a result.

Calculate the price elasticity of demand for a change in price from $10.00 to $15.00. Price Quantity $10.00 20 $15.00 15

For substitutes, the cross-price elasticity is ___, the own price elasticity is ___.

If the price elasticity of demand coefficient is (-)1, total revenue will remain constant when price rises or price falls.

More Practical Tools for Students Powered by AI Study Helper

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For substitutes, the cross-price elasticity is _, the own price elasticity is _.