Question

Heung City is a small and open economy. Citizens in Heung City enjoy mobile phone service, and the price elasticity of demand for this market is -0.7 . There are 3 mobile phone service providers in the city: Smartoo, Three-2-One, and Comnet. (a) The manager of Smartoo thinks that, as the price elasticity of demand for the mobile phone service is inelastic, raising price can raise revenue and profit. Do you agree? Explain briefly. (b) Recently, the government plans to implement "local number portability" rules, that allowing consumers to switch mobile phone service operators and maintain the same phone number. How would you expect this change to affect the Rothschild index for this industry?

Answer 1

The manager of Smartoo is correct that raising prices can increase revenue due to inelastic demand. The implementation of local number portability would likely lead to a reduction in the Rothschild index, suggesting increased competition in the mobile phone service market.

Step-by-step explanation:

(a) Price Elasticity and Revenue

The manager of Smartoo is correct to some extent as the price elasticity of demand for mobile phone service is inelastic with a value of -0.7. Inelastic demand means that the percentage change in the quantity demanded is less than the percentage change in price. Therefore, when the price is raised, the quantity demanded does not decrease significantly, leading to an increase in revenue. However, this relationship holds as long as the conditions in the market stay the same and the elasticity remains inelastic.

(b) Local Number Portability and the Rothschild Index

Upon implementation of the "local number portability" rules, it's expected that the competition among mobile phone service providers would increase. This increased competition would likely lead to a reduction in the Rothschild index, which indicates a decrease in market concentration and a move towards a more competitive industry structure, as consumers can more easily switch service providers without hassle.