Question

The current market price is $250 and quantity demanded at that price is 100 for textbooks. If price decreases to $100, and quantity demanded increased to 350. How much is the price elasticity of demand. Is the market for the economics textbook elastic, inelastic or unit elastic, and why?

Given the information on the price elasticity of demand of textbook, what happens to total revenue for this market for the decrease in price from $250 to $100.

Answer 1

Ans:

The price elasticity of demand is -1.3 or 1.3( absolute value )

The market for the economics textbook is elastic.

Explanation:

Initial price ( P1) = $250

New price ( P2) =$100

Initial quantity ( Q1) = 100

New quantity ( Q2) = 350

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 350 -100 ) / ( 100 - 250)} * {( 250 + 100 ) / ( 100 + 350)}

= ( 250 / - 150) * ( 350 / 450)

= -1.67 * 0.78

= - 1.3

When the price elasticity of demand > 1 , then the demand is elastic.

When the price elasticity of demand < 1 , then the demand is inelastic.

When the price elasticity of demand = 1 , then the demand is unit elastic.

Ans: The total revenue will increase.

Explanation:

At price $250;

Total revenue = Price * Quantity = $250 * 100 = $25,000

At price $100;

Total revenue = Price * Quantity = $100 * 350 = $35,000

When demand is elastic , then decrease in price will lead an increase in total revenue. But when demand is elastic , then increase in price will lead a decrease in total revenue.