Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 6: Problem 1

If the demand for orange juice is inelastic, will an increase in the price of orange juice increase or decrease the revenue that orange juice sellers receive?

Short Answer

Expert verified
For orange juice with an inelastic demand, an increase in price should increase the revenue that orange juice sellers receive.

Step by step solution

01

Define Inelastic Demand

The demand for a product is said to be inelastic if the quantity demanded by consumers does not change much with changes in price. It means that consumers will still buy nearly the same quantity even if the price increases. This is normally true for necessities where we do not have an option but to buy them.
02

Understand the Revenue

The revenue of the sellers is the total money they get from selling their product. It is calculated by multiplying the price of the product by the quantity sold.
03

Relation between Price and Revenue

In the case of inelastic demand, an increase in price does not cause a significant reduction in quantity demanded. Therefore, despite the potential reduction in quantity sold due to increased price, since the demand is inelastic, the revenue is expected to increase overall due to the price increase.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Price Elasticity of Demand
The price elasticity of demand is a measure that captures the responsiveness of the quantity demanded of a product to changes in its price. When consumers are less sensitive to price changes, we say the demand is inelastic. In mathematical terms, elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price.

With inelastic demand, the elasticity value is less than 1. This indicates that the change in quantity is proportionally less than the change in price. Products that are necessities, such as medication or basic food items, often exhibit inelastic demand because consumers have to purchase them regardless of price changes. Understanding this concept is crucial as it directly influences pricing strategies and expected revenue.
Consumer Behavior
Consumer behavior refers to the purchasing patterns and decision-making processes of buyers. When demand is inelastic, it suggests that consumers value the product so highly that they will continue to buy it even if the price goes up. This behavior is typical for essential items that do not have close substitutes.

Factors affecting consumer behavior include income level, preferences, and the availability of alternatives. For example, if orange juice is the only source of a particular nutrient, and no substitutes provide it, then an increase in its price will not significantly reduce its consumption, illustrating inelastic demand.
Revenue Calculation
Revenue calculation plays a pivotal role in business operations and involves determining the total income generated from sales. The formula for calculating revenue is simple: multiply the price at which goods or services are sold by the quantity sold \(\text{Revenue} = \text{Price} \times \text{Quantity Sold}\).

In the context of inelastic demand, an increase in price leads to a proportionally smaller decrease in quantity sold, if any decrease at all. Therefore, the overall effect is a rise in total revenue. Even if some customers are lost due to the price hike, the higher price paid by the remaining customers compensates for this loss, resulting in increased revenue for sellers of products with inelastic demand, such as the orange juice example given.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

In recent years, increases in the number of visitors to national parks such as Yellowstone and Grand Canyon have resulted in over \(\$ 12\) billion in deferred maintenance costs. In response to the overcrowding that has contributed to the cost overruns, the Park Service has considered limiting the number of daily visits to the parks and soliciting corporate sponsorships. Margaret Walls, a research director and senior fellow at Resources for the Future, has offered another suggestion: Increase entrance fees. But she warned: "Figuring out an efficient and fair fee structure will not be easy. It requires detailed data on visitation, for starters, as well as analysis to shed light on price elasticities of demand for different groups of visitors at different locations." Why is it important for the Park Service to have estimates of price elasticities of demand before raising entrance fees to the national parks?

The publisher of a magazine gives her staff the following information: $$ \begin{array}{l|l} \hline \text { Current price } & \$ 2 \text { per issue } \\ \hline \text { Current sales } & 150,000 \text { copies per month } \\ \hline \text { Current total costs } & \$ 450,000 \text { per month } \\ \hline \end{array} $$ The publisher tells the staff, “Our costs are currently \(\$ 150,000\) more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to \(\$ 3\) per issue. This will result in our revenue being exactly equal to our cost." Do you agree with the publisher's analysis? Explain. (Hint: Remember that a firm's revenue is calculated by multiplying the price of the product by the quantity sold.)

When San Francisco and other cities in California adopted soda taxes, an opinion column in the New York Times observed, "Often, the taxes don't even pinch the budgets of low-income families, because they respond by drinking less soda." What does the columnist mean when he writes that soda taxes don't "pinch the budgets" of low-income families? Shouldn't an increase in the price of soda resulting from a tax always increase the amount that families have to spend to buy soda? Briefly explain.

Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of the price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain.

Amazon allows authors who self-publish their e-books to set the prices they charge. One author was quoted as saying, "I am able to drop prices and, by sheer volume of sales, increase my income." Was the demand for her books price elastic or price inelastic? Briefly explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free