Question

The demand and supply curves facing a company producing a brand of coconut juice, Knust Coco Juice, are respectively given as follows:Qd = 50-5PQs = 2+3PThe company is contemplating to increase the price of the Knust Coco Juice as a measure to raise more revenue to support a planned expansion programme.

Answer 1

Qd = 50 - 5P

Qs = 2 + 3P

At equilibrium, demand = supply

50 - 5P = 2 + 3P

P = 6

At this price, Q = 20

Price elasticity of demand: [(dq / dp) * (p / q)]

(dq / dp) is the first derivative of demand function which is -5

Price elasticity of demand = [(-5) * (6 / 20)] = -1.5

We can ignore the negative sign here because there always exist a negative relationship between price and quantity demanded. Thus, elasticity of demand = 1.5

As elasticity of demand > 1, demand is elastic or the good is luxury good whose demand will fall if producer increase its price. If Knust Coco juice raise price to generate more revenue, consumers will reduce their demand which will eventually reduce total revenue. Thus, it is not a wise decision to raise price to generate more revenue.

answered by: anonymous