Carol owns a dry cleaning business with no other competition in town. She hires you as a consultant to ask how she can raise revenues. You tell her to increase the price of dry cleaning a suit from $4 to $5 and decrease the price of cleaning a sweater from $3 to $2.
a. Why did you give Carol this recommendation?
b. Would you offer the same recommendations if Carol asked you to help increase profits instead of revenues?
(a) Demand for dry cleaning a suit is inelastic, therefore an increase in its price will increase revenue in this segment. On the other hand, demand for cleaning a sweater is elastic, therefore a decrease in its price will increase revenue in this segment. Together, a price rise for dry cleaning of suits and a price cut for cleaning sweaters will increase total revenue.
(b) I would have given the same suggestion for profit increase. Since profit is the difference between total revenue and total cost, when total revenue increases, cost structure remaining unchanged, profit increases.
Carol owns a dry cleaning business with no other competition in town. She hires you as a consulta...
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