Suppose Theo is selling Urban Meyer and Karl Urban t-shirts. He can choose the p

Question

Suppose Theo is selling Urban Meyer and Karl Urban t-shirts. He can choose the price of t-shirts, ptUM for Urban Meyer t-shirts and ptKU for Karl Urban. Demand in the Urban Meyer market is robust and given by Q(p)UM. Demand in the Karl Urban is less robust and given by Q(p)KU. Initially Theo sells both t-shirts for $0.50, i.e., ptUM=ptKU=$0.50. Theo decides to increase the price in the Urban Meyer market but decrease it in the Karl Urban market. What can you tell me about the own-price elasticities of demand in the two markets?

Explanation / Answer

Theo will change the price in the markets to increase his total revenue so that he can increase his profits. This depends on elasticity of the market. When demand is inelastic, then as price increases, total revenue will also increase and when demand is elastic, then total revenue will increase as price decrease.
So, demand in the Urban Meyer market is inelastic and demand in the Karl Urban market is elastic, as total revenue can be increaes in Urban Meyer market by increasing the price and in Karl Urban market by decreasing the price.

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