Question

1. Suppose a decrease in the price of shoes from $50 to $30 per pair leads to an increase in the quantity of shoes demanded from 100 million to 150 million pairs. Use the midpoint formula to find the price elasticity of demand. Next, explain what would happen to revenues for a store decreasing the price of shoes to $30. When the price of a price elastic good goes up, what happens to revenues? When the price of a price inelastic good goes up, what happens to revenues?

Answer 1

P1 = 50

P2 = 30

Q1 = 100

Q2 = 150

Elasticity of Demand using Mid point method = [(Q2 - Q1)/(Q2+Q1)/2] / [(P2 - P1)/(P2+P1)/2]

Ed = [(150 - 100)/(150+100)/2] / [(30 - 50)/(30+50)/2]

Ed = (0.4/-0.5)

Ed = -0.8

Since, Ed < 1, so the demand is said to be inelastic

Below is the relationship between price and revenue when there is inelastic demand:

- An increase in the price raises revenue.

- A fall in the price reduces revenue.

So, a decrease in the price of shoes will lead to fall in the revenues of the firm

When the price of elastic good goes up, revenue falls.

When the price of a price inelastic good goes up, revenue increases