A game shop estimates that the price elasticity of demand on its newly released games is 2.0.In an effort to raise total revenue,the store should
A) increase the price on its newly released games.
B) decrease the price on its newly released games.
C) increase the price on direct substitutes such as one-year-old games.
D) decrease the price on direct substitutes such as one-year-old games.

Question

Quizplus · Accepted Answer

The price elasticity of demand is 2.0, which means that a 1% increase in price would decrease demand by 2%. Therefore, a decrease in price would increase demand and raise total revenue. Increasing the price on direct substitutes such as one-year-old games may not be effective in raising total revenue as consumers may switch to finding substitute products elsewhere.

A Game Shop Estimates That the Price Elasticity of Demand