Question

Below is a table containing weekly demand and supply numbers for No-Hyper Chocolate bars for children. As an employee at Sugar Shack Kids Candy Shoppe you want to impress your boss with your economics learning and explain to her at what price the store can maximize sales and profits of the chocolate bar. You will also explain elasticity to show your boss that this is a well thought out pricing strategy. P-$10, $9, $8, $7, $6, $5, $4, $3, $2, $1, $0 Q- 0, 10, 30, 50, 70, 90, 110, 130, 150, 170, 190.  i) Using the midpoint formula (not simple), a) calculate elasticity of demand if the price is changed from $1 to $2. b) and again if changed from $5 to $4. (2+2 marks)

ii) Calculate and list the total revenue per price point in the TR column in the table above. The selling price should be $ _________ (approximately) per bar which will generate a total revenue of $ ____________. (approximately).

iii) In the graph below label and then draw the demand curve and indicate using dashed lines a change in price from $6 to $7 and comment on changes you see. (2+2 marks)

Answer 1

(i) Ed = ∆Q/ (Q1+Q2)/2 / ∆P/ (P1+P2)/2
(a) Elasticity of demand when price is changed from $1 to $2:
= 20/180 / 1/1.50 = 0.11 * 1.50 = 0.17
(b) Elasticity of demand when price is changed from $5 to $4:
Ed = 20/100 / 1/4.50 = 0.5 * 4.50 = 0.9

The table:

ii) Calculate and list the total revenue per price point in the TR column in the table above.
  The selling price should be $ 5 (approximately) per bar which will generate a total revenue of $ 450.

iii) In the graph below label and then draw the demand curve and indicate using dashed lines a change in price from $6 to $7 and comment on changes you see.

(As the graph is not attached, I am using excel graph)

As we see in the graph, when price is increased from $6 to $7, total revenue falls. This is because quantity efffect is greater than price effect. Or, when price is increased from $6 to $7, quantity demanded decreases by more than proportionate amount.