Answer to Question #67754 in Microeconomics for Harsha
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? Motivate your decisions. [10 marks]
Laptops’ demand is elastic (Ke=2>1), so 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. USB drives have unit elastic demand, so it doesn’t matter how the price changes: the quantity demanded changes in the same extent, and total revenue doesn’t change. External drives have inelastic demand (Ke=0.53<1), so the price increasing leads to quantity decreasing in a smaller extent, and total revenue rises. So, it is expediently to increase the price for external drives.