A study found that in California, where car vanity license plates cost $28.75, the elasticity of demand was 0.52. In Massachusetts, where vanity plates cost $50, the elasticity of demand was 3.52. Assuming vanity plates have zero production cost, was each state collecting the maximum revenue it could from vanity plates? What recommendation should be given to each state to maximize revenue? Which state was most likely to be following a political unsupportable policy?
First it is imperative that it is understood what the total revenue of a supplier is in order to further answer these questions. The total revenue a supplier receives is the price he or she charges times the quantity he or she sells. In addition, the total revenue equals total quantity sold multiplied by the price of the good. Understanding this information will help and answer the following questions, because the elasticity tells sellers what will happen to total revenue if their prices change which we will soon see ...
Elasticity and revenues for California and Massachusetts vanity plates are discussed. The state which is more likely to follow a political unsupportable policy is determined.