University of Richmond Professor Erik Craft analyzed the states%u2019 pricing of

Question

University of Richmond Professor Erik Craft analyzed the states%u2019 pricing of vanity plates. He found that in California, where vanity plates cost $28.75, the elasticity of demand was 0.52. In Massachusetts, where vanity plates cost $50, the elasticity of demand was 3.52.

a) Assuming vanity plates have zero production cost and his estimates are correct, was each state collecting the maximum revenue it could from vanity plates? Explain your reasoning.

b) What recommendation would you have for each state to maximize revenue?

c) If these estimates are correct, which state was most likely to be following a politically unsupportable policy?

(Click to select)CaliforniaMassachusetts, (either California or Mass.) because not only is it not collecting maximum revenue but it is also charging a (Click to select)lowerhigher (either lower or highter) price than is optimal. It could simultaneously (Click to select)lowerraise (either lower or raise)price and increase revenues, which would please both those who buy vanity plates and the treasury.

d) Assuming the demand curves were linear, graphically demonstrate your reasoning in a and b.

Explanation / Answer

a The elasticity of demand is (DeltaQ/DeltaP)*(P/Q)...So as the proces og high,the elasticity of demand also goes higher.

b It all depends on circumstances as the elasticity is high the state with higher price may earn less revenue because people are willing to buy less of their product.But due to higher prices this lower sell may still generate higher revenue..What we can say is MR=P(1-1/e),thus MR will be higher in Masachusetts firm..

c Masachusetts is most likely to be following a politically unsupportable policy because of higher prices and thus incresing the elasticity.

                                                                        (Click to select)                                                                                                          California                                                                                                          Massachusetts                                                                , (either California or Mass.) because not only is it not collecting maximum revenue but it is also charging a                                                                         (Click to select)                                                                                                          lower                                                                                                          higher                                                                (either lower or highter) price than is optimal. It could simultaneously                                                                         (Click to select)                                                                                                          lower                                                                                                          raise                                                                (either lower or raise)price and increase revenues, which would please both those who buy vanity plates and the treasury

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