Consider the same good you chose in question #1 and the short-run elasticity giv

Question

Consider the same good you chose in question #1 and the short-run elasticity given for it in exhibit 6. Using the relationship between elasticity and revenue, explain whether or not the firm will want to raise its price.

I chose gasoline.

section 5.1 Price Elasticities of Demand for Selected Goods exhibit6 Good Salt Air travel Gasoline Medical care and hospitalization Jewelry and watches Physician services Alcohol Movies China, glassware Automobiles Chevrolets Short Run Long Run 0.1 2.4 0.7 0.9 0.7 0.1 0.2 0.3 0.4 0.6 0.9 0.9 1.5 1.9 3.6 3.7 2.6 2.2 4.0

Explanation / Answer

Consider gasoline and the short-run elasticity for it which is 0.2. According to the relationship between elasticity and revenue, we recognize that revenue is increased for a price increase in case of inelastic demand (elasticity falling between 0 and 1). Hence in this case because gasoline has a elasticity value lying between 0 and 1, a higher price will reduce quantity demanded by less than the given percentage of price hike so that revenue will rise. The firm will want to raise its price because it can observe that gasoline demand is inelastic in short run so increasing price will increase revenue.

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