Chapter 8: Problem 6

The demand for the good that firm A sells does not rise or fall during the month. Firm A raises its price at the beginning of the month and lowers its price at the end of the month. What might explain firm A's pricing behavior?

Short Answer

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Firm A's pricing behavior can be influenced by various factors. A theory based on the consumers' disposability of income suggests that Firm A initially raises prices as people generally have more income at the start of the month and may be willing to pay more. On the other hand, it decreases prices towards month-end when the buying power of consumers reduces. This strategic pricing, taking into account the consumers' financial cycles, could explain the notable pricing behavior of Firm A.

Step by step solution

Comprehend Firm A's Pricing Pattern

Take note of the fact that Firm A changes its pricing twice a month: once at the beginning and once at the end. Furthermore, these changes are opposites: the price increases at the beginning and decreases at the end.

Consider Economic Theories

Given the constant demand, consider some economic theories or business strategies that could explain this pricing behavior. Factors such as elasticity of demand, competitor pricing, strategic pricing or cyclical financial behavior of consumers might be the reasons behind this.

Analyze Possible Theories

In understanding the observed phenomena, possibly at the beginning of the month, consumers might have more disposable income (after paydays), the product may be considered inelastic therefore consumers are willing to pay a higher price. Firm A can increase prices to increase revenues. Towards the end of the month, disposable income might decrease, prompting Firm A to decrease prices to encourage sales.

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The demand for the good that firm A sells does not rise or fall during the month. Firm A raises its price at the beginning of the month and lowers its price at the end of the month. What might explain firm A's pricing behavior?

Short Answer

Step by step solution

Comprehend Firm A's Pricing Pattern

Consider Economic Theories

Analyze Possible Theories

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