Final answer:
The elasticity of demand in this scenario is 2, which means the demand is elastic and sensitive to price changes. Therefore, increasing the price is not recommended as it will likely decrease revenues. Alternative strategies should be considered to boost revenues instead.
Step-by-step explanation:
If you owned a haircutting shop and gave 20 haircuts a day for a price of $10, you would be making $200 per day. Considering increasing the price to $12 might lead to a decrease in the number of haircuts to 12 per day, resulting in a daily revenue of $144. Before deciding whether to increase the price, you should calculate the elasticity of the demand curve you are facing. Elasticity measures how much the quantity demanded responds to a price change. In this scenario, the percentage change in quantity is [(20 - 12) / 20] x 100 = 40%, and the percentage change in price is [(12 - 10) / 10] x 100 = 20%. Therefore, the elasticity of demand is 40% / 20% = 2, which means the demand is elastic.
Based on the elasticity of demand being greater than 1, it suggests that demand is sensitive to price changes. Therefore, increasing prices will lead to a disproportionate decrease in quantity demanded, which would lower your revenues. Instead of increasing prices, you could explore other strategies to increase revenues, such as offering premium services, selling hair care products, or implementing a loyalty program to retain customers and encourage more frequent visits.