Question

1.

T/F/Explain

Price elasticity of demand is measured using the slope of the demand curve.

2.

Our company, Slim ‘N Trim, Inc. sells pants for $40 a pair. After a successful year, you decide to try raising the price to $60. Your observation: sales drop from 50 pairs to 40. What is your price elasticity of demand calculated using the midpoint formula?

3.

After observing the value of your elasticity, does increasing your price increase, decrease, or have no effect on your total revenue? Why?

Answer 1

1. True.

The reason being that the price elasticity of demand is or where is the slope of the demand curve.

2. The price elasticity of demand would be , and for the given values, we have or or or .

3. The demand elasticity in previous part is less than 1 (in absolute value), meaning that the demand is inelastic. The interpretation would be that, for a unit percent increase in price, the demand is decreased by 0.5556%. Judging from the elasticity, we may say that, if the price is increased, the quantity would decrease less than the increase in price, meaning that the increase in price would more than offset the decrease in quantity, and hence, the total revenue would increase.

We may match this observation by the data given. The TR before was and the TR after is . As can be seen, the revenue indeed increased.