Question: “Three Guys Named Al” moving company is contemplating a price hike. Currently, they charge $20 per hour, but Al thinks they could get $30. Al disagrees, saying it will hurt the business. Al, the brains of the outfit, has calculated the price elasticity for their services in the range from $20 to $30 to be .5

a. Draw a demand curve, and explain the basic relationship between elasticity and total revenue. You don’t need to refer to this problem to do this, but certainly may.

b. Should they do as Al suggests and raise price? Why or why not?

c. Currently, “Three Guys” is the only moving company in town. Al reads in the paper that several new movers are planning to set up shop within the year. In 12 months, the price elasticity of demand for “Three Guys” services is likely to change. Will it be higher or lower? Why?