Question 1: Price elasticity of demand in relation with firms' revenue (11 marks, suggested word count: 400 words)

Scenario: A taxi service in Vietnam considers increasing the price from 24,000 vnd to 30,000 vnd/km in the ending months of the year 2021. It is because the costs of their company's business operations are rising under the prevailing Covid circumstance, and they are tempting to pass on the cost increases by increasing price to the consumer. The company's director wants to consult a marketing staff about the effect of the increase in price to the company's revenue. He expects the revenue is high enough to cover the increasing costs. The director has the only information of current quantity of his service demanded about 250 trips a day. The marketing staff's job is to anticipate the price elasticity of demand and use the data to inform the company director for the pricing decision.

Requirement:

a) [6 marks] If you were the marketing staff, you need to give the estimation of a change in quantity demanded for this company's taxi service responding to the price increase. How would the quantity demanded of this company's service change if the price increases? Would it increase or decrease? would it change relatively at high or low rate compared to price? (i.e. would the price elasticity be high or low?) Discuss at least two determinants of the price elasticity of demand, which make you confirm your estimation. You are required give hypothetical numbers and calculations to illustrate your estimation of the price elasticity of demand. Instruction: About the determinants of price elasticity of demand, you can have your own assumptions (pure theoretical reasonings), for example: would you argue the taxi service as necessity or luxury? What would be the price elasticity of the type of the necessity versus luxurious product? There are other theoretical discussions of the determinants of price elasticity of demand that you need to refer to in lecture of topic 2. Or do desk research for the relevant market information regarding to the determinants of the elasticity of consumers' demand to price.

b) [5 marks] Based on your estimation of the price elasticity in question (a), discuss the effect of the increase in price to the revenue of the company. What do you suggest to the company's director regarding to the pricing decision? Make sure you explain your suggestion by relevant theoretical formulas of price elasticity and firm revenue and the calculation with hypothetical numbers. Graphs are recommended, but not compulsory.