Suppose the elasticity of demand for your parking lot spaces, which are located in a downtown business district, is –1.8, and the price of parking is $11 per day. Additionally, suppose that your MC is zero, and your capacity has been 80% full at 9 AM each day over the last month. Since demand is ( ELASTIC, INELASTIC, OR UNIT ELASTIC) , and the lot is below capacity, (INCREASED, DECREASED, OR UNCHANGED) is the optimal pricing strategy.

Elastic

DECREASED

Explanation:

The price elasticity is elastic. Demand is price elastic if the absolute value of coefficient of elasticity is greater than 1.

When demand is elastic, it means that quantity demanded is sensitive to changes in price. A small change in price would lead to a greater change in quantity demanded.

Because the parking lot has been operating below its full capacity and marginal cost is zero, the optimal strategy is to reduce price so that quantity demanded would increase.

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