Brandon Wallace tutors economics students. He finds that when he charges $5 per hour, students demand a total of 30 hours of tutoring per week; however, when he raises his rate to $8 per hour, they demand only 26 hours of tutoring. a . Calculate the
price elasticity of demand for Brandon's tutoring. b. Is demand for Brandon's tutoring price elastic, unit elastic, or price inelastic? Which rate should he charge to maximize his revenue? c. Brandon finds that he can raise his rate to $10 per hour during the week before final exams and students will continue to demand 26 hours of tutoring. Explain why this is so.
a . Ed = (26 – 30) / [(26 + 30) / 2] ÷ ($8 – $5) / [($8 + $5) / 2] = –0.31 = 0.31
b. Demand is price inelastic. Brandon should charge $8.
c. Time becomes a critical factor for students as they face final exams. They have fewer opportunities to
adjust to a price increase.
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Money is
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