Question

3.

At the price of $20, the quantity demand of lawn hoses was 100. The price increased to $25, and the quantity demanded dropped to 95.

[ The two points on the demand curve are Point A: (100, $20) and Point B (95, $25).]

a) Calculate the price elasticity of demand for the hoses. ____________

b) Is it elastic, inelastic or unitary elastic? _____________

1. What happens to the total revenue in this case?_______________
2. What would happen to the total revenue if you decreased the price of this merchandise? _____________

4. (4 pts)

At the price of $20, the quantity demand of decorative pots was 100. The price increased to $25, and the quantity demand dropped to 75.

[ The two points on the demand curve are Point A: (100, $20) and Point B (75, $25).]

1. Calculate the price elasticity of demand for this merchandise.  ____________

2. Is it elastic, inelastic or unitary elastic?  ____________

3. What happens to the total revenue in this case?_______

4. What would happen to the total revenue if you decreased the price of this merchandise? _________________

Answer 1

3)

a) %change in quantity demanded = [(95 - 100) / 100] * 100 = -5%

%change in price = [(25 - 20) / 20] * 100 = 25%

Elasticity of demand = %change in quantity demanded / %change in price = [(-5%) / 25%] = -0.2

Wecan ignore negative sign which give elasticity = 0.2

b) As %change in quantity demanded < %change in price, it says that consumers are not responsive to change in price making demand inelastic.

c) As demand is inelastic and price rises, total revenue rises .

d) If you decrease the price of it, total revenue will fall as consumer will not change their quantity demanded by much even if price rises or fall.