Question

Given the price elasticities and price changes for the following products A–E in the table below, show how much the quantity will change (indicating an increase or decrease) and what effect this will have on total revenue (indicating an increase or decrease). Round your answers to 1 decimal place.

Product	Price elasticity	% ∆ Price	%∆ Quantity	∆ Total revenue
A	0.6	increase by 9%	(Click to select)  decrease  increase  by  %	(Click to select)  increase  decrease  constant
B	1.3	decrease by 6%	(Click to select)  increase  decrease  by  %	(Click to select)  increase  decrease  constant
C	0.3	decrease by 12%	(Click to select)  decrease  increase  by  %	(Click to select)  increase  decrease  constant
D	1.0	increase by 4%	(Click to select)  decrease  increase  by  %	(Click to select)  increase  decrease  constant
E	3.3	increase by 5%	(Click to select)  increase  decrease  by  %	(Click to select)  increase  decrease  constant

Answer 1

Price elasticity of demand = (% change in quantity demanded / % change in price)

Note: Price elasticty of demand is repsented in negative sign because there is an inverse relationship between quantity demanded and price.
So, if price elasticity is given as 0.6. Then take it as -0.6.

• Demand is elastic if absolute value of price elasticity of demand is less than 1.
• Demand is inelastis if absolute value of price elasticity of demand is more than 1.
• Demand is unitary elastic if absolute value of price elasticity of demand is equal to 1.

Relationship between pirce and total revenue.

If demand is elastic => then there is an negative realtionship between price and total revenue.

If demand is inelastic => then there is a positive relationship between price and total revenue.

If demand is unitary elastic => then there is no relationship between price and total revenue. So, total revenue remains same even if price changes.

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Product A.

Price elasticity of demand = (% change in quantity demanded / % change in price)

=> -0.6 = (% change in quantity demanded / 9)

=> % change in quantity demanded = -0.6 (9)

=> % change in quantity demanded = -5.4

% Δ Quantity decrease by 5.4%

Demand is inelastic, and price is increasing. It means Total revenue will increase.

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Product B.

Price elasticity of demand = (% change in quantity demanded / % change in price)

=> -1.3 = (% change in quantity demanded / -6)

=> % change in quantity demanded = -1.3*(-6)

=> % change in quantity demanded = 7.8

% Δ Quantity increase by 7.8%

Demand is elastic, and price is decreasing. It means Total revenue will increase.

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Product C.

Price elasticity of demand = (% change in quantity demanded / % change in price)

=> -0.3 = (% change in quantity demanded / -12)

=> % change in quantity demanded = -0.3 (-12)

=> % change in quantity demanded = 3.6

% Δ Quantity increase by 3.6%

Demand is inelastic, and price is decreasing. It means Total revenue will decrease.

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Product D.

Price elasticity of demand = (% change in quantity demanded / % change in price)

=> -1= (% change in quantity demanded / 4)

=> % change in quantity demanded = -1(4)

=> % change in quantity demanded = -4

% Δ Quantity decrease by 4%

Demand is unitary elastic, and price is increasing. It means Total revenue will remain constant.

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Product E.

Price elasticity of demand = (% change in quantity demanded / % change in price)

=> -3.3 = (% change in quantity demanded / 5)

=> % change in quantity demanded = -3.3 (5)

=> % change in quantity demanded = -16.5

% Δ Quantity decrease by 16.5%

Demand is elastic, and price is increasing. It means Total revenue will decrease.

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