Question

Suppose the number of firms you compete with has recently increased. You estimated that as a result of the increased competition, the demand elasticity has increased from –2 to –3, i.e., you face more elastic demand. You are currently charging $10 for your product. If demand elasticity is -3, you should charge [x].

Answer 1

Answer and Explanation:

An increase in the number of firms increases the demand elasticity. As the demand elasticity increases from 2 to 3 it means you could encounter less demand if product prices are increased. At a demand elasticity of -3, it is regarded as inelastic demand and a change in price will not affect the demand for the product as customers are still likely to patronize the product example gasoline. Due to its high demand, an increase in price will not readily affect the demand for it. Therefore if you are to change the price from $10 at 2 to 3 demand elasticity increase, the percentage of increase from 2 to 3 is given as.

3-2/2 X 100 = 50%

The new charge (x) at -3 demand elasticity = 50%/3 = 0.66666666

The increase in the new charge is therefore $10 + $10x = $10 + $10(0.166666) = $11.67