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:

Question

BlackTom AI · Accepted Answer

To analyze the revenue effect of a price change, we must compare the percentage change in price with the percentage change in quantity demanded.
Option a: 'Increase the price because the good is elastic.' This would be incorrect if the elasticity is less than 1 in magnitude; the calculation below shows the elasticity is inelastic, so the claim that demand is elastic is not supported by the given data.
Option b: 'Increase the price because the good is inelastic.' Here, we assess elasticity: price rises from 1 to 1.50, a 50% increase. Subscribers fall from 50,000 to 40,000, a 20% decrease. Elasticity = (% change in quantity) / (% change in price) = (-20%)/(+50%) = -0.4, which is inelastic (absolute value less than 1). In inelastic demand, raising price tends to increase total revenue because the percentage drop in quantity is smaller than the percentage rise in price. This aligns with the given data and revenue-maximizing intuition in inelastic cases.
Option c: 'Do not increase the price because the good is inelastic.' If demand is inelastic, a higher price can raise revenue, so recommending not to increase price would be counterintuitive given the goal of revenue maximization. The data suggest a revenue gain from increasing price, not preserving the current price.
Option d: 'Do not increase the price because the good is elastic.' This contradicts the elasticity assessment; the premise here would imply an elastic demand, but the observed changes indicate inelasticity, so this statement mischaracterizes the situation and would likely reduce potential revenue.
In summary, the comparison of price and quantity changes indicates a relatively inelastic response, which means a price increase would raise total revenue despite lowering subscribers. The other options either misclassify elasticity or draw the opposite revenue conclusion based on that misclassification.

251_ECO201 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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