Question

1. The demand curve for cameras is Q=400-2P where P is the price of a camera and Q is the number of cameras sold per week. Answer the following questions.
   1. If the vendor has been selling 120 cameras per week, how much revenue has she been collecting?
   2. What is the price elasticity of demand for cameras?
   3. Does the law of demand hold?
   4. If the vendor wants to generate more revenue, should she raise or lower the price of cameras?

Answer 1

Answer : a) Q = 120 cameras (Given)

From demand function we get,

Q = 400 - 2P

=> 120 = 400 - 2P

=> 2P = 400 - 120

=> 2P = 280

=> P = 280 / 2

=> P = 140

Revenue = P * Q = 140 * 120 = $16,800

Therefore, here vendor's revenue is $16,800.

b) Price elasticity of demand (Ed) = (Q / P) (P / Q)

=> Ed = - 2 * (140 / 120) = - 2 * 1.2

=> Ed = - 2.4

Therefore, here the price elasticity of demand is - 2.4 .

c) Yes, here the demand holds the law of demand. Because according to the law of demand if price rise then the quantity demanded decrease and vice versa. Here the elasticity of demand is - 2.4 which indicates that if price rise by 1% then the quantity demanded will fall by 2.4%. This means that here the demand is elastic. So, here the demand holds the law of demand.

d) Here the deman is elastic. For elastic demand if price fall then revenue increase. So, here the vendor should decrease the price level of cameras.