Question

Answer a, b and c

a) You are in the business of designing and selling websites .You currently charge $500 a website design and sell 5 websites a month. You are thinking of reducing the price to $400 in order to sell more websites. You go around asking people and find you can sell 3 more website.
How much more revenue do you gain from the increased sales? How much revenue do you lose from customers that used to buy it at the higher price?

b)

You currently charge $500 a website design and sell 5 websites a month. You are thinking of reducing the price to $400 in order to sell more websites. You go around asking people and find you can sell 3 more website. Consumers of your product have a price elasticity of demand that is:

( )       Elastic
()Inelastic
()Unitary elastic
()Cannot be determined

( )  Elastic
()Inelastic
()Unitary elastic
()Cannot be determined

C)

The demand for gasoline is relatively inelastic in the short run and gets more elastic in the longer run. If a tax was placed on gasoline, the tax would burden the gasoline stations (firms) more:

( )    in the short run
() in the long run
() Gasoline stations are burden by the tax in the same way in the short run or long run
() Gasoline stations are never not burden by the tax as they pass the tax on to consumers.

Answer 1

Question A)

Given:
Price = $500 per website

Quantity = 5 websites

Let us assume cost to design a website per month = C

therefore, Total Revenue

TR1 = 2500 - C

Now, for the next month when you decide to decrease the price, you are able to sell a higher quantity

TR2 = 3200 - C

Therefore, increase in revenue is,

Increased Revenue = $700

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Question B)

Price elasticity of demand is calculated by:

Therefore, the price elasticity of demand for websites is elastic, as it is more than 1.

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Question C)