Problem
You have a part-time job teaching voice and piano lessons to young students at your music studio. You currently charge $20/lesson and have 30 students.
i. Suppose when you raise your price to $25/lesson and do not lose a single student. How much revenue will you gain? Using the revenue test, what does this tell us about the PED (price elasticity of demand)?
ii. Suppose instead that when you raise your price to $25/lesson, you end up with only 24 students. How much revenue will you gain in this scenario? What can you conclude about the PED? Would you prefer to charge $20/lesson or $25/lesson?
iii. Suppose instead that when you raise your price of $25/lesson, you end up with only 20 students. How much revenue will you gain now? What can you conclude about the PED?