Question

Suppose that the elasticity of demand at a given price level is E(p)=0.8. What does that mean? Select both the correct answer to elastic, unit, or inelastic as well as what

A The company should do to increase revenue.
B The company should lower prices to raise revenue.
C The company should leave prices alone as the revenue is currently maximized.
D The company should raise prices to raise revenue.
E Since 0F Since 0G Since 0

Answer 1

An elasticity of demand at 0.8 is inelastic, meaning the company should raise prices to increase revenue. Elasticities greater than 1 suggest lowering prices, while an elasticity of 1 suggests maintaining prices.

Step-by-step explanation:

When the elasticity of demand, E(p), is 0.8, it indicates that the demand is inelastic. In the context of sales and revenue optimization, this means that the quantity demanded changes proportionately less than the price. So, for a company looking to increase revenue, the strategy would involve raising prices, as the decrease in the quantity sold will be less than proportional to the price increase, leading to an overall increase in revenue.

In summary, with an elasticity of demand at 0.8, the company should D. raise prices to raise revenue. If the elasticity were greater than 1 (elastic), they would be advised to lower prices. If the elasticity were equal to 1 (unit elastic), they should maintain current prices because revenue is already maximized.