Question

3 - From the following data about the demand for dishwashers, calculate the elasticity of demand from point A to B, from point C to D and from point E to point F. Classify the elasticity as elastic, inelastic or unitary elastic. Also calculate the total revenue of each point. What happens to total revenue as you approach unitary elasticity? If cost were not an issue what price would you choose for your selling price?

Point	Price In Dollars	Quantity Demanded	Total Revenue	Elasticity
A	180	5600
B	200	5200
C	220	4800	$1,056,000
D	240	4400
E	260	4000		-1.42
F	280	3600

Answer 1

Point	PRICE	Q Demanded	Total Revenue (P * Q)	(dq/dp)	(P/Q) = (P1+P2)/(Q1+Q2)	Elasticity ((dq/dp) * (P/Q) )
A	180	5600	$       1,008,000	-20	0.035185185	-0.703703704	Inelastic (e < 1)
B	200	5200	$       1,040,000
C	220	4800	$       1,056,000	-20	0.05	-1	Unit Elastic (e = 1)
D	240	4400	$       1,056,000
E	260	4000	$       1,040,000	-20	0.071052632	-1.421052632	Elastic (|e| > 1)
F	280	3600	$       1,008,000

* Total revenue remains same i.e it does not change when there is an increase in price when we approach towards unitary elastic. ( Point C to D ).

* If cost is not an issue , then price choosen as selling price would be $ 240. At this price revenue is maximized and quanity produced is less as compared to point C where revenue is same. Therefore from Firm's perspective the selling price choosen would be $240.