Winged Treasures is a specialty store that sells butterfly ornaments. The owner wants to increase her total revenue and knows that the price elasticity of demand for her product is -0.4. What should she do to her price?

a. Leave it unchanged and use another way to increase sales,

b. Raise it by any amount,

c. Decrease it to zero,

d. Lower it by a relatively large amount,

e. Lower it by a relatively small amount.

• The correct answer is b. Raise it by any amount.

The method to interpret the price elasticity of demand coefficient is given below.

• PED=0 - This means that the demand is perfectly inelastic.
• 0>PED<1 - This means that the demand is inelastic.
• PED=1 - This means that the demand is unitary elastic.
• PED>1 - This means that the demand is elastic.

Very often, the negative sign is omitted from calculations. However, the negative sign means that an increase in price will cause a decrease in demand. The most important for the analysis is the PED coefficient. In the problem, the PED coefficient is 0.4. This means that the demand is inelastic, or in other words, the demand for the product will decrease in a smaller percentage relative to the percentage increase in price. Therefore, any price increase will generate an increase in revenue. In conclusion, the correct answer is option b.

On the other hand, option a. is incorrect because that would be the correct strategy for a unitary elastic demand. Option c. is incorrect because revenue depends on price and a zero price means zero revenue. Options d. and e. are also incorrect because lowering the price could be a good strategy only for a highly elastic demand.