Many states offer drivers an opportunity to customize their license plates for t

Question

Many states offer drivers an opportunity to customize their license plates for the price of a small premium paid to each state; these plates are known as vanity plates. When vanity plates were originally introduced in Texas they could be acquired for a mere price of $20 over the cost of a normal license plate. By 2005 the price jumped to $50 at this price 154,000 Texans purchased vanity plates. Shortly after Texas increased prices of vanity plates to $150 and sales fell to on 56,000 plates. Faced with the sudden decline legislators dropped the price to $80 per vanity plate.
Compute the arc price elasticity of demand between $50 and $150 assuming no other factors have changed, given the calculation why did they drop the price to $80? What other factors should be considered by legislators in future pricing decisions?

Explanation / Answer

original price $20 By 2005 the price jumped to $50 at this price 154,000 Texans purchased vanity plates. Shortly after Texas increased prices of vanity plates to $150 and sales fell to on 56,000 plates. Faced with the sudden decline legislators dropped the price to $80 per vanity plate. price elasticity of demand =dq/dp(p/q)=[154000-56000]/$100( $150 /56,000 ) now we know that price is one of the major factors deciding the demand of a commodity . so with increase in price demand has fallen down .so to increase the demand price was lowered keeping all other factors same

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