Question

g 6. (3 points) your business is in a bit of financial trouble. to alleviate some financial pressure, your boss wants to reduce the average cost per client. using the information you gathered above, give an argument for or against raising prices (hint: what effect will raising prices have on demand and therefore on the number of lawn mowing clients you have per month?

Answer 1

Pricing of a new hair growth drug should be guided by the price elasticity of demand; lower price for elastic demand and higher price for inelastic demand. The price elasticity of supply for gasoline affects delivery companies like UPS or FedEx, leading to cost optimizations. An increase in income causing decreased bread consumption indicates bread is an inferior good.

Step-by-step explanation:

Considering you're at a pharmaceutical company wanting to maximize revenue for a new hair growth drug, the price elasticity of demand plays a crucial role in pricing decisions. With an elasticity of 1.4, demand is elastic, suggesting that a price increase could lead to a disproportionate decrease in the quantity demanded, thereby reducing total revenue. Therefore, lowering the price could increase total revenue due to higher sales volume.

When the elasticity is 0.6, the demand is inelastic, meaning that changes in price have a less than proportional effect on the quantity demanded. In this case, raising the price may lead to an increase in total revenue since the decrease in quantity demanded will likely be smaller than the increase in price. If the elasticity is exactly 1, it indicates unit elasticity, where changes in price lead to proportionate changes in quantity demanded, and revenue remains constant regardless of price alterations.

For companies like UPS or FedEx, the price elasticity of supply for gasoline indicates how responsive supply is to changes in price. An elastic supply means that a small change in gasoline prices will cause a large change in the quantity supplied. If gasoline prices drop and supply is elastic, delivery companies may increase their service areas and supply more deliveries at a lower operational cost, potentially increasing profits.

Concerning the consumption of bread, if income increases and people buy less bread, it shows that bread has a negative income elasticity of demand, classifying it as an inferior good. Consumers may switch to perceived higher-quality or more desirable alternatives as their income increases.