# Price elasticity of demad, determinants of elasticity

#1: (Categories of Price Elasticity of Demand) for each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elasticity range identified.

a. ED = 2.5

b. ED = 1.0

c. ED = 8

d. ED = 0.8

#4: (Determinants of Price Elasticity) Why is the price elasticity of demand for Coca-Cola greater than the price elasticity of demand for soft drinks generally?

#3: (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations:

a. A firm with total revenues of $150 million, explicit cost of $90 million, and implicit costs of $30 million

b. A firm with total revenue of $125 million, explicit costs of $100 million, and implicit costs of $30 million

c. A firm with total revenue of $100 million, explicit costs of $90 million, and implicit cost of $20 million

d. A firm with total revenues of $250,000, explicit costs of $275,000, and implicit costs of $50,000

#### Solution Preview

Solution:

#1:For each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elasticity range identified.

a. ED = 2.5

Absolute value of price elasticity of demand is greater than 1, it is elastic. In this case percentage change in quantity is higher than corresponding percentage change in price. So, total revenue will decrease as a result of price increase.

b. ED = 1.0

Absolute value of price elasticity of demand is equal to 1, it is unit elastic. In this case percentage change in quantity is equal to corresponding percentage change in price. So, total revenue will remain unchanged as a result of price increase.

c. ED = 8

Absolute value of price elasticity of demand is greater than ...

#### Solution Summary

There are three problems. Solution to first problem predicts the effect of price increase on total revenue for given values of elasticity. Solution to second problem explains the reasons for higher elasticity of Coca-cola. Solution to third problem explains the methodology to calculate economic and accounting profit for given cases.