A firm is currently producing in the elastic portion of its demand curve. What course of action do you recommend for it assuming it wants to raise revenue?
Continue producing at the current output level, because it maximizes its total revenue by producing in the elastic portion of its demand curve.
Reduce price, because if it reduces price and demand is elastic, total revenue will increase.
Increase price, because if it increases price and demand is elastic, total revenue will increase.
Continue selling at the same price, but increase the amount it produces.
Calculate the price elasticity of demand ( EP) when price increase from $ 2 to $ 3. Is demand elastic , inelastic or unit elastic? Quantity 8-7
To determine the best course of action for the firm to raise revenue, we need to understand the concept of elastic demand and its relationship with total revenue.
Elastic demand refers to a situation where a change in price results in a relatively larger change in the quantity demanded. In this case, the firm is currently producing in the elastic portion of its demand curve. When demand is elastic, the firm has some flexibility to adjust its pricing strategy to maximize revenue.
Here are the options and their explanations:
1. Continue producing at the current output level: This option suggests that the firm should maintain its current production level because it maximizes total revenue. This recommendation assumes that the current price and quantity combination fall within the range of the demand curve where small price changes lead to significant shifts in quantity demanded.
2. Reduce price: If the firm decreases its price and demand is elastic, it can expect an increase in total revenue. This is because the decrease in price will incentivize consumers to purchase more quantities, thus offsetting the potential loss in revenue from lower prices.
3. Increase price: If the firm raises its price and demand is elastic, it can still expect a positive impact on total revenue. However, this strategy relies on the premise that the increase in price does not significantly decrease the quantity demanded. If demand is highly elastic, a higher price could lead to a substantial reduction in demand, resulting in lower revenue.
4. Continue selling at the same price, but increase the amount produced: This option suggests maintaining the current price but increasing the quantity produced. While this strategy can potentially lead to higher total revenue, it assumes that the current price is optimal and that increasing production will not negatively impact demand or increase costs to an unsustainable level.
The best course of action will depend on various factors like market conditions, competition, and cost structures. Analyzing price elasticity of demand and conducting further research or market analysis can help the firm make an informed decision on which strategy is most likely to raise revenue.