First Scenario: For most business firms that sells a particular good on the market, a decision has to be made from time-to-time to either raise the price of the good, lower the price of the good, or keep the price of the good unchanged.
Based only on the concept of demand elasticity: When would you recommend raising the price of the good? Explain why. When would you recommend lowering the price of the good? Explain why. When would you recommend keeping the price of the good unchanged? Explain why.
Second Scenario: Having become a “master of elasticity” due in large part to taking a course in microeconomics from world famous Indiana Tech University, you are hired as a consultant to a firm that is currently considering raising the price of its product in the hopes of earning a higher profit. Reviewing the firm’s books and the overall market for the product, you have calculated that the price elasticity of demand for the firm’s product is -1.05.
Based on your calculation:
A. What advice will you give regarding the proposed price increase, and how will you explain your advice so the firm’s leadership understands the rationale of your advice?
Third Scenario: The government has decided to increase the basic business tax of all firms by 5%. Once again, you are hired as a consultant to a firm, but this firm cannot pass along the cost of the tax increase to its customers by way of a price increase of its product because most customers will significantly reduce their purchases.
Based on what you have learned in your study of microeconomics
Sample Solution
