o the firm can always increase revenue by reducing price. On the other hand if the firmis operating in an inelastic range of a linear demand curve the firm can increaserevenue by upping the price. Increasing the price would cause quantity demanded tofall. However, the percentage decrease in quantity would be less than the percentageincrease in price. Therefore total revenue would increase.
o a firm operating in theinelastic range of a linear demand curve can always increase revenue and profits byraising the price. Revenue is maximized where elasticity equals one because whendemand is inelastic revenue can be increased by raising prices and when demand iselastic revenue can be increased by lowering prices.To determine whether the price cut for each of the products is significant or not woulddepend on whether the products are necessities or luxury products and whether their demand is elastic, inelastic or unitary elastic. If all the three products are necessities(inelastic demand), then the percentage decrease in price will result in a smaller percentage increase in quantity demanded hence total revenue will decrease and profitwill decrease. On the other hand if the products are luxuries (elastic demand), thepercentage decrease in price would result in a greater percentage increase in quantitydemanded hence total revenue will increase but profit increase will depend on total cost.If the products face a unitary demand the decrease in price will not have any effect ontotal revenue or profit as the percentage change in price will be the same as thepercentage change in quantity demanded.Therefore whether the percentage price cut is significant or not to achieve the objectiveof profit maximization will depend on the characteristics of the products, that is whether any of the products faces elastic demand which case the price cut is significant if andonly if it can cover total cost and still ensures that the firm achieve its objective of profitmaximization. The percentage price cut will not be necessary if the product(s) facesinelastic demand as the product(s) will still be bought whether the price is reduced or increase. The product is a necessity so a change in price will have a very little impact onquantity demanded. The percentage price cut will also have no effect if the productfaces a unitary demand as the percentage price cut will equally be off-set by percentageincrease in quantity demanded.In summary, to achieve profit maximization objective, the characteristics of the variousproducts (elastic, inelastic or unitary) must be considered before any decision on pricecut is taken.
If the numerical values of elasticity are 0.84 then the product has inelastic demand. Inthis case ³peace´ has inelastic demand and hence a price cut will lead to a fall in profit.To achieve profit maximization, a product with inelastic demand must see an increase inprice as any percentage increase in price will be greater than a percentage decrease inquantity demanded.