Question

6. Elasticity and total revenue

The following graph shows the daily demand curve for bikes in San Diego.

Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve.

Note: You will not be graded on any changes made to this graph.

 

Answer 1

Following table shows the Total Revenue schedule -

Price (P)	Quantity demanded (Q)	Total Revenue (P*Q)
50	30	1,500
75	27	2,025
100	24	2,400
125	21	2,625
150	18	2,700
175	15	2,625
200	12	2,400

Following is the required figure -

At Point A,

Quantity demanded (Q1) = 21 bikes

Price (P1) = $125 per bike

At Point B,

Quantity demanded (Q2) = 24 bikes

Price (P2) = $100

Calculate the price elasticity of demand -

The price elasticity of demand is 0.6 or 0.6 (This value can be written without negative sign as well).

The value of the price elasticity of demand is less than 1. This means that demand is inelastic.

According to the mid-point method, the price elasticity of demand between points A and B is approximately 0.6.

Suppose the price of bikes is currently $125 per bike, shown as point A on the initial graph. Because the demand between points A and B is inelastic, a $25-per-bike decrease in price will lead to decrease in total revenue.

In general, in order for a price increase to cause an increase in total revenue, demand must be inelastic.