For each of the following cases use linear demand curves and graph and explain how total...

For each of the following cases use linear demand curves and graph and explain how total revenue changes. Label (q1, p1) and (q2, p2). Label, note and explain the opposing effects on revenue due to the changes in price and quantity.

A. Elasticity >1, price increases

B. Elasticity >1, price decreases

C. Elasticity <1, price increases

D. Elasticity <1, price decreases

Solutions

Expert Solution

A. Elasticity > 1 . This implies that the demand is elastic. So, a percentage change in quantity demanded is more than the percentage change in price. Now, we can see in the figure below that When P=$2 , Q=40 units. And when P increases to $2.5 , Quantity decreases to 20 units. Earlier, TR= (2)(40)= $80 . And After increase in price , TR= (2.5)(20)= $50. This implies that when elasticity >1 and price increases , TR falls.

B. Elasticity >1. This implies that the demand is elastic. So, a percentage change in quantity demanded is more than the percentage change in price. Now, we can see in the figure below that When P=$2.5, Q=20 units. And when P decreases to $2, Quantity increases to 40 units. Earlier, TR= (2.5)(20)= $50 . And After decrease in price , TR= (2)(40)= $80. This implies that when elasticity >1 and price decreases , TR rises.

C. Elasticity <1 . This implies that the demand is inelastic. So, a percentage change in quantity demanded is less than the percentage change in price. Now, we can see in the figure below that When P=$2, Q=30 units. And when P increases to $5, Quantity decreases to 20 units. Earlier, TR= (2)(30)= $60 . And After increase in price , TR= (5)(20)= $100. This implies that when elasticity <1 and price increases , TR rises.

D. Elasticity <1 . This implies that the demand is inelastic. So, a percentage change in quantity demanded is less than the percentage change in price. Now, we can see in the figure below that When P=$5, Q=20 units. And when P decreases to $2, Quantity increases to 30 units. Earlier, TR= (5)(20)= $100 . And After decrease in price , TR= (2)(30)= $60. This implies that when elasticity <1 and price decreases , TR falls.

Rahul Sunny answered 1 year ago

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