Question

1.         Suppose that the relationship between the price of steel and the quantity of steel demanded is as follows:

                                 Price             Quantity

                                   $1                       8

                                    2                      7

                                    3                      6

                                    4                      5

                                    5                      4

                                    6                      3

            a.         Calculate the arc elasticities between each of the prices in the above demand curve (i.e. between $1 and $2, between $2 and $3, etc.)

            b.         Draw a graph showing the above demand curve and label the elasticities you just calculated between each price.

            c.         Calculate the total revenue (expenditures) at each price.  Note the change in TR as price increases.

            d.         Generalize from the above -- what is the relationship between price elasticity and total revenue (expenditures).

Answer 1

The formula that we can use to calculate the arc elasticity is as follows

When P = $ 1, Q = 8

When P = $ 2, Q = 7

When. P = $ 2,Q = 7

When. P = $ 3, Q = 6

Like wise we can calculate for the remaining combinations.

See the attached image I have calculated elasticity using the same formula

b. Refer below the demand curve

The elasticity of demand is arc elasticity so I have mentioned it in between the two points. Refer the image

c. Refer below the value of Total revenue at different price levels

d. From the total revenue column and the elasticity column we can see the

• Total revenue is maximum when elasticity = 1.
• In case elastic demand higher the price lower the total revenue and lower the price higher the revenue.
• In case of inelastic demand higher the price higher the total revenue and lower the price lower the total revenue.

These are the three important relationship between elasticity and total revenue.

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.