The radio quiz show Wait Wait!.!.!.!Don’t Tell Me! recently asked the following question: Which state has the highest number of vanity license plates? The correct answer is Virginia, where over 10 percent of cars have vanity license plates such as 10SNE1 and GLBLWRMR. An economist might have extended the question to ask why there are so many vanity plates in Virginia.

Although Virginians may be unusually vain, a more plausible explanation is that the price of vanity plates is only $10, or about one-third of the average price in the United States.

Is the low price in Virginia rational from the state’s perspective? Suppose the state’s objective is to maximize the revenue from vanity plates. According to a recent study, the demand for vanity plates in Virginia is inelastic, with a price elasticity of demand equal to 0.26. Therefore, if the state increased the price, the total revenue from vanity plates would increase.

Question.

How does an increase in price affect total expenditures?

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