Recently, pacific cellular ran a pricing trial in order to estimate

Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area and increased prices by 5 percent to customers in those areas. One week later, the number of customers enrolled in Pacific’s cellular plans declined 4 percent in those states, while enrollments in states where prices were not increased remained flat. The manager used this information to estimate the own-price elasticity of demand and, based on her findings, immediately increased prices in all market areas by 5 percent in an attempt to boost the company’s 2012 annual revenues. One year later, the manager was perplexed because Pacific Cellular’s 2012 annual revenues were 10 percent lower than those in 2011—the price increase apparently led to a reduction in the company’s revenues.

Did the manager make an error?

 

Yes – the one-week measures show demand is inelastic, so a price increase will decrease revenues.

 

Yes – cell phone elasticity is likely much larger in the long-run than the short-run.

 

No – the cell phone market must have changed between 2011 and 2012 for this price increase to lower revenues.

 

Yes – the one-week measures show demand is elastic, so a price increase will reduce revenues.

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