Question

1. Cal sold 4,000 gallons per day at a price of $2.189 per gallon. He raised the price 1 cent to $2.199 per gallon, and revenues and profits dropped. His station sold 3,600 gallons per day at $2.199 per gallon. Fixed costs are $250 per day. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profits are revenue minus all costs.)

Answer 1

Reduction in quantity = 4,000 - 3,600 = 400

%reduction in quantity = 400 / 4,000 = 10%

Increase in price = $ 0.01

%age increase in price = 0.01 / 2.189 = 0.46%

What is the price elasticity of demand?

Price elasticity of demand = % change in quantity demanded / % change in price = 10% / 0.46% =  21.89

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Can the elasticity be characterized as elastic, inelastic, or neither?

Since, increase in price has led to reduction in quantity purchased, and price elasticity of demand is > 1, the elasticity can be characterized as "Elastic".

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By how much did revenues increase or decrease as a result of the change in price?

Change in revenue = Revenue now - revenue initially = $ 2.199 x 3,600 - 2.189 x 4,000 = - $ 839.60

Hence, the revenue decreased by $ 839.60 as a result of the change in price.

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By how much did profits increase or decline? (Profits are revenue minus all costs.)

Profits = Revenue - All costs = Revenue - Variable costs - Fixed costs

Since your question is silent about variable costs, we will not be able to solve this part of the question. Please look for information on the variable cost or purchase cost of the gasoline. Please see if there is any paragraph preceding or succeeding the paragraph that you have posted here. There has to be some information on the purchase ocst or variable cost to address this sub part.