Question

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?a. the mayor b. the city manager c. The answer depends on the price elasticity of demand d. The answer depends on the costs of construction of the new municipal swimming pool.

Answer 1

Answer:

C) The answer depends on the price elasticity of demand.

Explanation:

The price elasticity of demand (PED) measures how much does the quantity demanded of a good or service changes proportionally to a 1% change in the price of the good or service.

For example, if the price of gasoline increases by 10%, but the quantity demanded only decreases by 5%, then the PED = 5% / 10% = 0.5 which means that gasoline has an inelastic demand (usually basic necessities with few substitutes have inelastic demands)

If the price of hamburgers increases by 10%, and the quantity demanded decreases by 20%, then the PED = 20% / 10% = 2 which means that hamburgers have an elastic demand.

PED's can be elastic if they are > 1, inelastic if they are < 1, and price unitary if they are = 1.

If the pool's demand is inelastic, a price increase will decrease the quantity demanded in a smaller proportion (THE MAYOR IS RIGHT).

If the pool's demand is elastic, a price decrease will increase the quantity demanded in a larger proportion (THE CITY MANAGER IS RIGHT).

If the pool's demand is price unitary, a price increase will decrease the quantity demanded in the same proportion (ANY CHANGE IN PRICE IS USELESS, BOTH ARE WRONG).