Answer to Question #67690 in Microeconomics for Lulama Majozi
suppose that you are the managing director of a firm that supplies three goods: laptops, USB drives and external hard drives. The price elasticity of the demand for laptops is 2.0; for USB drives it is 1.00; and for external hard drives it is 0.53. the firm is experiencing serious cash flow problems and you have to increase total revenue as soon as possible. you are in a position to set the prices for these goods. What would be your pricing strategy for each product?
The main purpose of pricing strategy of any firm is to maximize revenues. By definition, total revenue (TR) is obtained by multiplying quantity demanded of a product (Qx) by price (Px), that is TR=Q×P If good’s demand is elastic (Ke>1), as it happens with laptops (Ke=2.0) , the price decreasing leads to quantity increasing in a greater extent, and total revenue rises. So, it is expediently to decrease the price for laptops. If Ke=1, as it happens with USB drives, it doesn’t matter how the price changes: the quantity demanded changes in the same extent, and total revenue doesn’t change. So, there is no any difference whether to increase the price or reduce. If good’s demand is inelastic (Ke<1), as it happens with external drives (Ke=0.53), the price decreasing leads to quantity increasing in a smaller extent, and total revenue falls, and vice versa. So, it is expediently to increase the price for external drives.