Question

section 5.1 exhibit 6 Good Salt Air travel Gasoline Medical care and hospitalization Jewelry and watches Physician services Alcohol Movies China, glassware Automobiles Chevrolets Price Elasticities of Demand for Selected Goods Short Rurn Long Run 0.1 2.4 0.7 0.9 0.7 0.3 0.4 0.6 0.9 0.9 1.5 3.7 2.2 4.0

Consider the same good you chose in question #1 and the short-run elasticity given for it in exhibit 6 (AIR TRAVEL)

Using the relationship between elasticity and revenue, explain whether or not the firm will want to raise its price.

Answer 1

Elasticity is given by percentage change in elasticity due to a 1% change in price. While total revenue is given by price into quantity.

The revenue will increase the rise in price is more than the fall in quantity and it will fall if a fall in quantity is more than the rise in price.

In this case, E=0.1 which means that a percentage rise in price leads to only a 0.1% fall in quantity. A high increase in price leads to only a small fall in quantity will imply that the total revenue of the Air Travel firm goes up. Therefore, the firm will choose to increase its price in the short run.