Question

2. Consider the following demand schedule for widgets:

Price ($ per widget)	Quantity (# per month)
10	5
8	40
6	70
4	90
2	100

What is the price elasticity of demand for widgets between $8 and $10?______ What is the elasticity of demand between $2 and $4? ______ As price decreases, demand becomes more / less elastic. What is total revenue per month at a price of $4?______ A reduction in price from $4 to $2 causes total revenue to rise / fall because demand is elastic / inelastic. If price is currently $2, then a 1% increase in price will cause a______ percent increase / decrease in quantity demanded.

Answer 1

Price elasticity of demand = Percentage change in Quantity demanded / Percentage change in price

Percentage change in price = 8 - 10 / 10 = -20%

Percentage change in Quantity demanded= 40 - 5/5 = 700%

E = 700/20 = -35 between 8 and 10. Elastic demand as elasticity is greater than 1.

Percentage change in price = 2 - 4 / 4= -50%

Percentage change in Quantity demanded= 100 - 90/90 = 11.11%

E = 11.11 / -50 = -0.228 between 2 and 4. Inelastic as elasticity is less than 1.

As price decreases, demand becomes less elastic.

At P = 4. Q = 90, TR = P*Q = 4 x 90 = 360

A reduction in price from $4 to $2 causes total revenue to fall because demand is inelastic.

When demand is inelastic, a decrease in price leads to a smaller increase in quantity and hence, revenue falls.

If price is currently $2, then a 1% increase in price will cause a 0.22 percent decrease in quantity demanded.

Price elasticity at $2 = - 0.228 which means 1% increase in price will decrease quantity demanded by 0.22%