Question

When Vincent’s Produce increases the price of strawberries from $4.75/pound to $5.25/pound, he finds that sales drop from 330 pounds/week to 310 pounds/week.

Calculate the price elasticity of demand for Vincent’s strawberries.

Is demand elastic, inelastic or unit elastic?

Did Vincent’s revenue from strawberry sales increase, decrease or stay the same?

Med rents surfboards on the big island of Hawaii. He’s been charging $10/hour and averages 32 rentals an hour. When he lowered the rate to $9.50/hour the average hourly rentals increased to 36.

Calculate the price elasticity of demand for Med’s surfboard rentals.

Is demand elastic, inelastic or unit elastic?

Did Med’s revenue from surfboard rentals increase, decrease or stay the same?

Answer 1

1. Price Ed = P/Q x Change in Q/Change in P

P = 4.75, P' = 5.25, Q = 330 and Q' = 310

Price Ed = 4.75/330 x (310 - 330)/(5.25 - 4.75) = 4.75/330 x - 20/0.50 = - 95/165 = - 0.576

Demand is inelastic because Ed < 1

When demand is inelastic and price increases then TR of firm increases.

2. P = 10, P' = 9.50, Q = 32 and Q' = 36

Price Ed = 10/32 x (36 - 32)/(9.50 - 10) = 10/32 x 4/(- 0.50) = - 2.5

Ed > 1 i.e. Elastic demand.

When demand is elastic and price decreases then TR increases.