bellsouth mobility ran a pricing trial in order to estimate the elasticity of de
ID: 1215784 • Letter: B
Question
bellsouth mobility ran a pricing trial in order to estimate the elasticity of demand for its services. the manager selected 4 states that were representative of its entire service area and increased prices by 5% to subscribers in those areas. one month later, the number of its customers enrolled in bm's plan declined 4% in those states, while enrollments in states where prices were not increased remained flat. based on this information, the manager estimated the own price elasticity of demand and based on her finings immediately increase prices in oaa markets by 5% in an attempt to boost the company's revenues one year later, the manager was confused because bm's revenues were down 10%. apparently, the price increase led to a reduction in the company's revenues. did the manager make a mistake? explain
Explanation / Answer
Elasticity of demand = Percentage change in Quantity demanded / Percentage change in the Prices
= 4 / 5 = 0.80
Since, the demand of the good is inelastic, any increase in the prices will lead to increase in the total revenue.
But when is was implemented, the total revenue has fallen, thus, manager has made a mistake in calculating the elasticity of demand. The actual price elasticity is greater than 1 and the demand of the product is elastic.
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