Question

The following table shows the market for cranberries:

Price (kgs)	Quantity demanded (kgs)	TR	Quantity supplied (kgs)
$ 10	0		40
$ 8	10		30
$ 6	20		20
$ 4	30		10
$ 2	40		0

a.       (2) Determine the price elasticity of demand for cranberries as the price changes from $8 to $6. Use the midpoint formula. Is demand elastic or inelastic?

b.       (2) Which price range maximizes total revenue for sellers? What is the price elasticity of demand equal to at this price range?

c.       (2) The demand curve for cranberries in this example is a downward sloping straight line. Explain briefly how the degree of elasticity changes as you move from a price of $10 down to a price of $2.

d.       (2) Sam claims that the demand for cranberries is highly inelastic. Which determinant of price elasticity of demand would support this claim? Explain.

e) (2) A cranberry farmer states that his supply of cranberries is perfectly inelastic. Describe the slope or shape of the supply curve and explain which determinant of price elasticity of supply would support this statement?

Answer 1

a. Price elasticity of demand for cranberries = Change in Q/(Q0+Q1)/2 / Change in P/(P0+P1)/2

  

= 10/15 / -2/7

= -2.333

As Elasticity is greater than 1 so we can say that demand is elastic.

b. Total revenue at $8 and $6 is maximum i.e. $120 So Price range is between $6-$8 which maximises total revenue for sellers. Price elasticity of demand at this price range is

Price elasticity of demand = %change in quantity demanded / %change in price

= 10/10 / -2/8

= -4

c.As we move down from $10 to $2 Price elasticity of demands become less and less elastic

from $8 to$6, Ped = 4

$6 to$4, Ped = 1.5

$4 to$2, Ped = 0.67

Ped = Price elasticity of demand so we can see that with decrease in prices Ped becomes less and less elastic

d. There are very less substitutes of cranberries so thats why demand for cranberry is highly inelastic. 'Substitutes' determinent will support this claim as it explains that commodity having more substitutes have highly elastic demand and vice versa.