An electronics retailing chainhas established the monthlyprice (p)- demand (n ) relationship for a Nintendo game as: . They are trying to set a price levelthat will provide a maximum revenue (R). They know that when demandis elastic, a drop in price will result in higher overall revenuesand that when demand is inelastic, anincrease in price will result in higher overall revenues. Tocomplete the questions in this task, you will have to use theelasticity definition: E = –
Converted into differential notation.
1. Determine the elasticity of demand at $20 and $80, classifying these price points as having elastic or inelastic demand. What does this say about where theoptimum price is in terms of generating the maximum revenue?Explain. Also calculate the revenue at the $20 and $80 pricepoints. ( 5 marks)
2. Determine the pricepoint where where you will not want to increase or decrease theprice to generate higher revenue. ( Hint: Think about the specificvalue of E where you won’t want to increase or decrease theprice to generate higher revenues) . 5 marks
3. A second game has aprice demand relationship of . The price is currently set at$50. Should the company increase or decrease the price? Explain. 5marks.