Question

 6. Elasticity and total revenue

 The following graph shows the daily demand curve for bikes in Detroit.

 Use the green rectangle (triangle symbols) to compute total revenue at varipus prices along the demand curve.

 Note: You will not be graded on any changes made to this graph.

 On the following graph, use the green point (triangle symbol) to plot the annual total revenue when the market price is $30, $45, $60, $75, $90, $105, and $120 per bike.

Answer 1

Price	Quanity ( Bikes)	Total Revenue
$30	32	$960
$45	28	$1,260
$60	24	$1,440
$75	20	$1,500
$90	16	$1,440
$105	12	$1,260
$120	8	$960

Explanation:

Total revenue = Price * Quantity

Ans: According to the mid-point method, the PED between point A and B is approximately - 0.53.

Explanation:

Initial price ( P1) = 60

New price ( P2) = 45

Initial quantity ( Q1) = 24

New quantity ( Q2) = 28

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= { ( 28 -24 ) / ( 45 - 60 ) } * { ( 60 +45 ) / ( 24 + 28)

= ( 4 / -15) * ( 105 / 52)

= - 0.2666 * 2.0192

= - 0.53

Ans: Suppose the price of bikes is currently $45 per bike, shown as point B on the initial graph. Because the demand between points A and B is inelastic , a $15 per bike increase in price will lead to increase in total revenue per day.

Ans: In general, in order for a price decrease to cause a decrease in total revenue , demand must be inelastic.