Suppose a firm sells to senior citizens and others at a single price of $3. At t

Question

Suppose a firm sells to senior citizens and others at a single price of $3.  At this price it sells 10,000 units total (2,000 to seniors; 8,000 to others).  It estimates that at the $3 price, seniors have an elasticity of -3 while others have an elasticity of -1.5.  

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?  Be specific, and show that your suggestion works by calculating the change in profits from your suggestion.

Explanation / Answer

The elasticity shows that the supply for seniors is more inelastic than others which signifies that any rise in price would lead to lesser riserin supply for seniors in comparison with others.

-3 elasticity shows that any 1% rise in price would lead to 3 % riseris quantity supplied for senior and 1% rise in price would lead to 1.5% rise in quantity supplied for others.

when Price = 3, Q1= 2000, Q2=8000

Profit = 3*2000+3*8000= 6,000+24,000= 30,000

When there is 1% rise in price, P'=3.03

quantity supplied for seniors and others would remain same

Profit"=3.03*2000+3.03*8000

= 30300

Change in profits= 30,300-3000= 300

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