Question

Use the information below to answer the following questions.

The demand and supply curves facing a company producing a brand of coconut juice, orange Juice, are respectively given as follows:Qd =50-5PQs=2+3P.The company is contemplating to increase the price of the orange juice as a measure to raise more revenue to support a planned expansion programme.

Questions
i.What is the equilibrium price and quantity for the orange Juice?
ii. What is the price elasticity of
demand for the orange Juice?
iii. As the marketing director of the company do you consider the intended increase in price of orange Juice advisable? Explain your choice.
iv. How best can the company achieve its objective of raising more revenue?

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Answer 1

i) we know at equlibrium level the quantity Demanded = quantity supply

So 50 - 5P = 2 + 3P

50 - 2 = 3P + 5P so 48 = 8P hence P = 48/8 = 6

Q = 50 - 5(6) = 20.

So the equlibrium price = $6 and equlibrium quantity = 20 units

ii) we know that Ed = ∆Q/∆P×P/Q

We know ∆Q/∆P= dQ/dP = d/dp(50 - 5P) = -5

So ∆Q/∆P = -5

So Ed = -5×6/20 = -6/4 = (-) 1.5 hence Ed > 1

It means elasticity of Demand is highly elastic.

iii) As the marketing director of a company I am not advised to increase the price of orange juice because the elasticity of Demand for orange juice is highly elastic, it means small increase in price is lager decrease in quantity Demanded due to which total revenue decreases.

Iv) To achieve its objective of raising more revenue the company should decrease its price because when Demand is highly elastic the percentage Change in quantity is more than percentage change in price. For example if the company decrease its price by 10% the quantity Demanded increase by more than 10% due to which the total revenue of the company increases.