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Managerial Economics and Globalization - ECO 550
Week 2 Problem Set

Jason Hanson

1. For each of the following cases, what is the expected impact on total revenue of the firm? Explain your reasoning.

a. Price elasticity of demand is known to be -0.5, and the firm raises prices by 10 percent.
This is an inelastic demand. If prices are raised by 10 percent then total revenue is raised. In an inelastic price demand prices and total revenue are proportional.

b. Price elasticity of demand is known to be -2.5, and the firm lowers price by 5 percent. This is an inelastic demand. If prices are lowered by 5 percent then the total revenue

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