Answer to Question #188512 in Microeconomics for Vanessa

Question

Justina owns the Just's sobolo store. She charges GHS 10 per bottle for her handmade sobolo. You, the economist calculated the elasticity demand for sobolo in her town to be 2.5. If she wants to increase her total revenue,what advice will you give her and why?

Answer 1

The price elasticity of demand for sobolo is 2.5, meaning the price elasticity is greater than one, hence the commodity in question is elastic.

In case if the price elasticity is greater than 1 that is elastic, company should reduce the price in order to increase the revenue. By reducing the price, total revenue can be increased.

Elasticity of demand is said to be elastic when percentage change in price is less than percentage change in quantity demanded. Therefore by reducing the price, Quantity demanded will be increased by greater percentage , as a result total revenue will be increased.