If the price elasticity of a product is -0.5, is it a good idea to cut the price?

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- Sep 4th 2007, 07:00 PMjhayesprice elasticity of demand of -0.5
If the price elasticity of a product is -0.5, is it a good idea to cut the price?

- Sep 4th 2007, 07:48 PMJakeD
Look at the effect on revenue $\displaystyle PX.$

$\displaystyle \frac{d(PX)}{dP} = \frac{dP}{dP}X + P\frac{dX}{dP} = X(1 + \frac{PdX}{XdP}) = X(1 -.5) = .5X > 0.$

So revenue moves in the same direction as price. Cut price, cut revenue. Doesn't sound good like a good idea.