You are the manager of a firm that is producing a highly elastic product (think of...
You are the manager of a firm that is producing a highly elastic product (think of a luxury, non-necessity item). The owner of the company is wondering whether she should increase or decrease the price of the product in order to raise revenues from their current levels. What would you tell her and why?
Homework Answers
As the good is a luxury and luxury goods have an elastic price elasticity of demand which means that the percentage change in demand for the good will be greater than the percentage change in price.
If the price is increased by 10%,the demand will decrease by more than 10%.
So,it is not advisable to increase the price of the good in order to raise revenue as raising price will decrease the revenue in case of an elastic demand.
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