Question

Suppose that the price of a kilo of bananas drops from $3.5 to $1.5, and as a result, the quantity sold increases from 60 to 180 kilos. a) What is the value of total revenue before and after the price change? Round your answers to 1 decimal place. $ and $ . b) What is the percentage change in the price? c) What is the percentage change in the quantity? d) What is the value of the price elasticity of demand? Round your answer to 2 decimal places. e) Is the demand elastic or inelastic?

Answer 1

Answer – Let us first derive the demand schedule for the two price-quantity combinations:

Price ($)	Quantity (Kg)
3.5	60
1.5	180

1. The total revenue earned before the price change = $3.5 * 60 = $210.0

The total revenue earned after the price change = $1.5 * 180 = $270.0

2. The percentage change in price = ($1.5-$3.5)/$3.5 * 100 = 57.14%
3. The percentage change in quantity = (180-60)/60*100 = 200%
4. The value of price elasticity of demand is given by:

Price elasticity of demand (PED) = (% change in quantity)/(% change in price) = (200%/57.14%) = 3.50

5. The price elasticity of demand is elastic because absolute value of PED > 1. This can be interpreted as: Consumers are more responsive to a price change because percentage change in quantity demanded is greater than the percentage change in price.