Question

.   From the hypothetical market demand schedule in the table, determine the total revenue. On two graphs, plot the demand schedule and total revenue. Find the elasticity of market demand between the points (A and B, B and C, etc) and indicate whether the price elasticity of demand is elastic, inelastic, or unitary elastic. Please show all work to receive full marks.
Alternative or point   Price
(in $)   Quantity demanded
(million units/year)
A   $3.50   1
B   3.00   2
C   2.50   3
E   2.00   4
F   1.50   5
G   1.00   6
H   0.50   7

b.   Assuming the current price is $2.50, if a firm wishes to increase total revenue, should they increase or decrease price?

Answer 1

Points	price (P) $	Qd ( Million units) Q	TR $ (P×Q)	Price Ed
A	3•50	1	3•5	-
B	3	2	6	Elastic
C	2•50	3	7•5	elastic
E	2	4	8	elastic
F	1•50	5	7•5	inelastic
G	1	6	6	inelastic
H	0•50	7	3•5	inelastic

The above graph shows demand schefule of a firm indicating inverse relationship between price and quantity demanded .

It shows total revenue ( TR) schefule which occurs by multiplying price and quantity ( P×Q)

The table also shows price elasticity of market demand as per the total expenditure method of elasticity of demand .

The method states the three observations----

* When with the fall in price, total expenditure of consumer or total revenue of firm increases, demand is said to be elastic( as shown in points B &C & E)

* When with the fall in price, total revenue Decreases, Demand is said to be inelastic.( As shown against points F,G,H)

* When with the fall in price, the total revenue remains the same ,it is called unitary elastic Demand ( it doesn't occur in this question)

# Graph showing demand curve ( graph---1) & total revenue (TR) curve( graph------2)

Along x axis is Quantity ( in million units) along y axis --

Price ($) ( graph 1)

Total revenue ( graph 2)

Demand curve gives the negetive slope showing inverse relationship between price and quantity demanded

TR curve is bell shaped showing initially increase, then stable and afterwards Decreasing.

b) The firm should decrease its price

If Currently ,the firm is charging $2•50 and it wants to increase its revenue ,it should decrease its price.

Calculations------

See the avove table----

- we find that agaist price of $2•50 ,TR= $7•5

If firm reduces price to $2, TR increases to $ 8

So, total revenue increase with decrease in price from $2•5 to $2.

Thanks