Suppose a firm sells to senior citizens and others at a single price of $5. At t

Question

Suppose a firm sells to senior citizens and others at a single price of $5. At this price it sells 10,000 units total (2,000 to seniors; 8,000 to others). It estimates that at the $5 price, seniors have an elasticity of -4 while others have an elasticity of -2. a) How could this firm change its pricing strategy to increase profits while holding its overall level of production constant and continuing to use only linear (per unit) prices? Show that your suggestion is viable by calculating the change in profits.

Explanation / Answer

The firm can charge a higher price from others as their demand is comparatively less elastic.

For example, if it charges $6 from others and the usual $5 from the seniors, then its total revenue increases to (5*2000)+(6*8000) = $58000.

Given costs are constant as before, an increase in total revenue unambiguously increases total profits also.

Thanks!

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