Final answer:
The price elasticity of demand determines whether the demand is elastic or inelastic at a certain price. At an elasticity of 1.4, a company should lower prices to increase revenue, while at 0.6, it should raise prices. For logistic companies, gasoline price elasticity affects cost management.
Step-by-step explanation:
To answer a student's question about a fried chicken franchise's demand equation, it's essential to calculate the price elasticity of demand when the price is $30 and then determine if the demand at that price is elastic or inelastic.
The price elasticity of demand measures how quantity demanded of a good responds to a change in its price. It is calculated by taking the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is greater than 1, the demand is considered elastic; if it is less than 1, the demand is inelastic. At the exact value of 1, the demand is unit-elastic.
If you were advising a pharmaceutical company with a product elasticity of 1.4, you should recommend lowering the price since demand is elastic, and this would increase total revenue. Conversely, if elasticity were 0.6, demand would be inelastic, and you should consider raising the price to increase revenue. If elasticity were exactly 1, the company should keep the price the same as total revenue is maximized at this point.
For companies like UPS or FedEx, understanding the gasoline price elasticity of supply is crucial for logistics planning and cost management. A low elasticity would mean they face a steep increase in operational costs when gas prices rise, as their ability to pass on these costs or find alternative suppliers may be limited.
Concerning the consumption of bread, an analysis using the income and quantity consumed can determine the income elasticity of demand. If the elasticity is positive, then an increase in income leads to an increase in demand, indicating that bread is a normal good. If the elasticity is negative, bread would be considered an inferior good since demand decreases as income increases.