5.19. T-Mobile. It is estimated that, if T-Mobile were to increase the price of its basic plan by 10 percent, demand would decline by 20 percent. What is the value of the price elasticity of demand? Sup- pose that T-Mobile's current margin (price minus unit variable cost divided by price) is equal to 25 percent. What should T-Mobile do: increase price, decrease price, or keep it constant?
5.19. T-Mobile. It is estimated that, if T-Mobile were to increase the price of its basic plan by 10 percent, demand would decline by 20 percent. What is the value of the price elasticity of demand? Sup- pose that T-Mobile's current margin (price minus unit variable cost divided by price) is equal to 25 percent. What should T-Mobile do: increase price, decrease price, or keep it constant?
Chapter5: Elasticity Of Demand And Supply
Section: Chapter Questions
Problem 1.1P: (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of...
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5.19 explain.
![### 5.19. T-Mobile
It is estimated that, if T-Mobile were to increase the price of its basic plan by 10 percent, demand would decline by 20 percent. What is the value of the price elasticity of demand? Suppose that T-Mobile’s current margin (price minus unit variable cost divided by price) is equal to 25 percent. What should T-Mobile do: increase price, decrease price, or keep it constant?
In this scenario, the problem provides enough information to explore the concept of price elasticity of demand, which is a measure of how sensitive the quantity demanded of a good is to a change in price.
#### Key Concepts:
- **Price Elasticity of Demand (PED):** This can be calculated using the formula:
\[
\text{PED} = \frac{\%\text{ Change in Quantity Demanded}}{\%\text{ Change in Price}}
\]
- **Calculation:**
- Percentage change in price = 10%
- Percentage change in demand = -20%
- Therefore, the PED = (-20% / 10%) = -2
A PED value of -2 indicates that the demand is elastic, meaning consumers are relatively responsive to price changes in T-Mobile’s basic plan.
#### Decision-Making:
- **T-Mobile’s Margin:** The problem statement mentions a margin of 25%. Given the elasticity, if T-Mobile increases prices, the higher sensitivity causes a proportionally larger drop in demand, impacting total revenue.
- **Recommendations:**
- Since the demand is elastic (\(PED < -1\)), increasing the price would lead to a decrease in total revenue.
- It may be advisable for T-Mobile to lower the price or adjust strategies to increase demand while maintaining or increasing revenue, considering the impact on profit margins.
This exercise allows students to apply economic principles to real-world business decisions, emphasizing the importance of understanding consumer behavior and market dynamics.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F29484458-c49a-4784-8582-6da2b7d9fbab%2Fd441bf4e-4029-4649-8ce0-2399f13886cf%2Flfm91kr_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### 5.19. T-Mobile
It is estimated that, if T-Mobile were to increase the price of its basic plan by 10 percent, demand would decline by 20 percent. What is the value of the price elasticity of demand? Suppose that T-Mobile’s current margin (price minus unit variable cost divided by price) is equal to 25 percent. What should T-Mobile do: increase price, decrease price, or keep it constant?
In this scenario, the problem provides enough information to explore the concept of price elasticity of demand, which is a measure of how sensitive the quantity demanded of a good is to a change in price.
#### Key Concepts:
- **Price Elasticity of Demand (PED):** This can be calculated using the formula:
\[
\text{PED} = \frac{\%\text{ Change in Quantity Demanded}}{\%\text{ Change in Price}}
\]
- **Calculation:**
- Percentage change in price = 10%
- Percentage change in demand = -20%
- Therefore, the PED = (-20% / 10%) = -2
A PED value of -2 indicates that the demand is elastic, meaning consumers are relatively responsive to price changes in T-Mobile’s basic plan.
#### Decision-Making:
- **T-Mobile’s Margin:** The problem statement mentions a margin of 25%. Given the elasticity, if T-Mobile increases prices, the higher sensitivity causes a proportionally larger drop in demand, impacting total revenue.
- **Recommendations:**
- Since the demand is elastic (\(PED < -1\)), increasing the price would lead to a decrease in total revenue.
- It may be advisable for T-Mobile to lower the price or adjust strategies to increase demand while maintaining or increasing revenue, considering the impact on profit margins.
This exercise allows students to apply economic principles to real-world business decisions, emphasizing the importance of understanding consumer behavior and market dynamics.
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