Question

2. After seeing your analysis of his decline in profit, Cal decides to lower the price of gas to $2.179 per gallon. After this change, the volume sold increased to 4,400 gallons per day. He asks you to measure his business gains or losses at $2.179. 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

Increase in quantity = 4,400 - 4,000 = 400

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

Reduction 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, reduction in price has led to increase 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 = $ 2.179 x 4,400 - 2.189 x 4,000 = + $ 831.60

Hence, the revenue increased by $ 831.60 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.