Question

Suppose an office supply store increased its price of file folders from $.79/box to $.99/box and...

Suppose an office supply store increased its price of file folders from $.79/box to $.99/box and the quantity demanded decreased from 85 boxes/month to 83 boxes/month.

What is the price elasticity of demand for file folders?

Tell whether the demand is elastic, unit elastic or inelastic.

What happens to the total revenue generated for the office supply store as a result of the price increase, and how does it show the relationship between elasticity and total revenue?

Homework Answers

Answer #1

PED = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

          = (83 - 85) / (0.99 - 0.79) * (0.79 + 0.99) / (85 + 83)

          = (-2 / 0.20) * (1.78 / 168)

         = -3.56 / 33.6

         = -0.11

The absolute value of PED is 0.11. Since it is less than 1, inelastic.

Since demand is inelastic, an increase in price will lead to an increase in total revenue. Thus, total revenue for the office supply store will increase as a result of the price increase.

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