Answer to Question #76618 in Macroeconomics for David
2.The owners of an oil filling station read an article in a trade publication stating that the own-price elasticity of demand for diesel is -0.3. because of this highly inelastic demand, they are thinking about raising prices at their stations to increase revenue and profits. Do you recommend this strategy based on the information they have obtained. Explain.
However on route, price elasticity is -2.5, which shows that it is relatively elastic. Hence, when the price is raised, the revenue will fall. So on route 2 , fare revision decision will cause revenue loss and hence is a bad decision.
2. The own-price elasticity of demand for diesel given is -0.3. Demand is in-elastic with respect to price, when percentage change in the quantity demanded is less than corresponding percentage change in the price. Hence the decision about raising prices at their stations to increase revenue and profits, is good, as revenue increases since demand for diesel is inelastic with respect to price.
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