A professional services firm is investigating revenue management as a means of taking advantage of unused capacity. Analysts for this firm estimate a demand curve for the firm's service, which is sold by the hour

Question

Points on this demand curve include 9000 hours at the current rate of $60 per hour, 9500 hours at $55, 10,000 hours at $50, and 10,500 hours at $45. Based on this demand curve, what price point would be best for the firm, if its objective is maximum revenue?

Answer 1

The yields of these price points are as follows: at $60 per hour, revenue is $540,000; at $55, revenue is $522,500; at $50, revenue is $500,000; and at $45, revenue is $472,500. The firm would be well advised not to lower its price, since that will not raise revenue. The lower prices will generate more demand, and utilize some unused capacity, but the firm's revenues will fall. (Demand in this case is rather inelastic).