Question

1. The following information describes the demand schedule for the market for a particular good. Use this information to determine the price elasticity of demand with a price change from $3,000 to $3,300. Show your work.

Price	Quantity demanded
$3,000	240,000
$3,300	200,000
$3,600	160,000
$3,900	120,000
$4,200	80,000

Suppose that you are the owner of the firm that produces this good and that you currently charge $3,000 per unit. Your closest competitors charge $3300 for an identical product. Describe how you can use the information about elasticity to determine whether or not to increase your prices.

1. Compute the total revenue under both price schemes. What happens to your total revenue if you decide to increase prices? Show your work.

Answer 1

price elasticity measures the magnitude of change in quantity demanded to a change in price.

When Ep is greater than 1, product is elastic, Which means that an increase in the price of the product cause more than proportionate change in quantity demanded, as a result total revenue decreases.

When Ep is less than 1, product is inelastic, which means that an increase in the price of the product cause less than proportionate change in quantity demanded, as a result total revenue increases.

When Ep is equal to 1, product is unit elastic, which means that an increase in the price of the product cause proportionate change in quantity demanded, as a result total revenue remains same.

Elasticity of demand of product when price change from 3000 to 3300 is

P is initial price =3000

Q is initial quantity=240000

Ep= 1.66

the value of price elasticity id 1.66 , ie product is elastic. An small increase in the price leads to more than proportionate decrease in quantity demanded, as a result total revenue decreases.

As the commodity is price elastic in nature, increase in price from 3000 to 3300 would leads to an fall in total revenue.Therefore, it is not desiarable to increase price. rather producer can keep their price constant as continue to enjoy current total revenue or increased total revenue ( when competitor charge 3300, people tend to reduce the consumption of competitors product, intead consume product with price 3000 thereby total revenue will increase)

a. Total revenue when price is 3000

Total revenue = price *quantity

=3000*240000

=720,000,000

Total revenue when price is 3300

total revenue=3000*200,000

=660,000,000

If price increases from 3000 to 3300, total revenue decreases by 60,000,000