A firm currently charges a price of $100 per unit of output, and its revenue (price...
A firm currently charges a price of $100 per unit of output, and its revenue (price multiplied by quantity) is $70,000. At that price it faces an elastic demand (εQ,P < −1). If the firm were to raise its price by $2 per unit, which of the following levels of output could the firm possibly expect to see? Explain. (a) 400 (b) 600 (c) 800 (d) 1000
Homework Answers
Currently, we have P x Q = 70,000 where P is 100. Hence Q is 70,000 / 100 = 700 units. Now price is increased by 2 units. Demand is elastic in this region so an increase in price should reduce revenue. Hence new revenue should be less than 70,000 or that 102 x Q < 70,000. This gives Q = 400 or 600 and respective revenues at 400 x 102 = 40800 or 600 x 102 = 61200. Hence option a) and b) are correct.
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