Question

4. a) On Tuesday, price and quantity demanded are $7 and 120 units, respectively. A week later, price and quantity demanded are $6 and 150 units, respectively. What is the price elasticity of demand between the price of $7 and the price of $6? Use both the mid-point formula method and the percentage change method. b) The numbers from both methods are a bit different but their interpretation is the same. Interpret this elasticity. (i.e. is it elastic or inelastic or unitary?) c) Given your finding above, should you raise or lower the price of this product in order to increase total rev venue? Briefly explain.

Answer 1

(a)

(i) Using midpoint method, Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(150 - 120) / (150 + 120)] / [$(6 - 7) / $(6 + 7)]

= (30 / 270) / (- 1 / 13)

= - 1.44

(ii) Using point method, Elasticity = (Change in demand / Original demand) / (Change in price / Original price)

= [(150 - 120) / 120] / [$(6 - 7) / $7)]

= (30 / 120) / (- 1 / 7)

= - 1.75

(b) Using both methods, absolute value of elasticity is greater than 1, so demand is elastic.

(c) With elastic demand, total revenue can be increased by decreasing price.