Answer to Question #187982 in Economics of Enterprise for THILAKAVATHY THILA

Question

If demand function is given as the following: 

Qz = 230 -2.75 Pz + 0.5 I + 1.2 Pm + 0.6A 

Where Qz is quantity of Good z sold, Pz is price of Good z per unit, I is per capita income, Pm is price of competitor and A is the amount of advertising spent. 

Current values:  Pz= RM 55 I= RM 9000    Pm= RM 50    A =RM 12,000

a)   Should the firm consider giving a price discount in order to increase total revenue?

Answer 1

$$Q_Z=230-2.75\times55+0.5\times9000+1.2\times50+0.6\times12000$$

$$Q_Z=11990$$

$$E=-2.75\times\frac{55}{11990}=-0.01$$

As you can see, in this case, absolutely inelastic demand, that is, demand, the volume of which remains unchanged for any price changes. Consequently, the firm can increase the price of the product to generate more revenue.