CLO #1 – Describe how goals, constraints, incentives, and market rivalry affect economic decisions.
CLO #2 – Analyze demand, supply, equilibrium prices, and price elasticities as a quantitative tool to forecast changes in revenues.
Recently, Verizon Wireless ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area and increased prices by 5 percent to customers in those areas. One week later, the number of customers enrolled in Verizon’s cellular plans declined 4 percent in those states, while enrollments in states where prices were not increased remained flat. The manager used this information to estimate the own price elasticity of demand and, based on her findings, immediately increased prices in all market areas by 5 percent in an attempt to boost the company’s 2020 annual revenues. One year later, the manager was perplexed because Verizon’s 2020 annual revenues were 10 percent lower than those in 2019—the price increase apparently led to a reduction in the company’s revenues. Did the manager make an error? Explain