Question

In: Economics

7. In each case below, determine the effect on the sellers' total revenue and identify whether...

7. In each case below, determine the effect on the sellers' total revenue and identify whether the demand curve in this particular market is elastic, inelastic, or unit-elastic in the relevant price range.
a. When the price per package of a brand of chocolate chip cookies increases from $4 to $5, monthly quantity demanded decreases from 20 000 to 15 000.
b. A fall in the price of sugar from $4 to $3 per carton raises weekly quantity demanded from 20 000 to 25 000 cartons
c. A rise in the quantity demanded of a monthly fashion magazine from 35 000 to 40 000 copies occurs when its newsstand price is reduced from $10 to $9.
d. Daily quantity demanded of a particular model of digital music player rises from 5000 to 6000 players if its price drops from $60 to $50

Solutions

Expert Solution

Answer. Total Revenue is equal to Price*Quantity. So total revenue at old prices with old quantities and new prices with new quantities will be compared. Price elasticity is equal to percentage change in quantity demanded divided by percentage change in price of the good. Mathematically it can be written as, elasticity = [(Q1 - Q0)*P0]/[(P1 - P0)*P0].

(a) Old total revenue = 4*20000 = 80000. New total revenue = 5*15000 = 75000.

Elasticity = (15000-20000)*4 divided by 20000*(5-4) = -20000/20000 = -1. Thus it is unit elastic.

(b) Old total revenue = 4*20000 = 80000. New total revenue = 3*25000 = 75000.

Elasticity = (25000-20000)*4 divided by 20000*(3-4) = 20000/-20000 = -1. Thus it is unit elastic.

(c) Old total revenue = 10*35000 = 350000. New total revenue = 9*40000 = 360000.

Elasticity = (40000-35000)*10 divided by 35000*(9-10) = 50000/-35000 = 1.43. This is price-elastic as it is more than one.

(d) Old total revenue = 60*5000 = 300000. New total revenue = 50*6000 = 300000.

Elasticity = (6000-5000)*60 divided by 5000*(50-60) = 60000/-50000 = 1.2. This is price elastic as it is more than one.

Rahul Sunny answered 7 months ago
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