You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. What should you do to increase revenue if the price elasticity of demand is 0.98?

a. Raise the admission price

b. Lower the admission price

c. Nothing, revenue is maximized at current admission price

The answer to what you should do to increase revenue if the price elasticity is 0.98 is option B) Lower the Admission price

Explanation:

The price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. This is a term used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % change in Quantity Demanded / % Change in Price

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). On the other hand, a product is deemed inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

At 0.98, the price elasticity is very close to!.0 which is Unit elastic.

However, since it is very close to unit elastic: an economic theory that assumes a change in price will cause an equal proportional change in quantity demanded. Here, demand or supply is perfectly responsive to price changes by the same percentage.

It is not advisable to raise the price of admission to increase revenue. Rather, the aim should be to reach Unit Elastic by reducing the admission rate through a promotional offer that will sustain existing clients and attract additional customers thereby generating more revenue.