# Price elasticity of demand and revenue

Warburtons one of the largest producers of bread in the UK decided to lower bread prices by 7%. Suppose that as a result of the price decrease, the volume of bread sold by Warburtons increases by 6%. What can you infer about the own price elasticity of dmand for Warburtons bread? Can you predict how the revenues on the sales of Warburtons Crumpets would be affected? Explain.

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#### Solution Preview

The own price elasticity of demand is define as:

Percentage change in quantity demanded divided by percentage change in price.

If it is greater than one, the product is said to be elastic. That is the percentage change in quantity demanded is larger than the percentage change in price. In other word the quantity demanded is sensitive to the change in price.

If the own price elasticity of demand is less than one, the product is said to be inelastic. That is the percentage change in quantity demanded is smaller than the percentage change in price. In other word the quantity demanded is not sensitive to the ...

#### Solution Summary

The own price elasticity of demand is defined as the percentage change in quantity divided by the percentage change in price. If it is greater than 1.0 it is elastic and inelastic if the value is less than 1.0. If the product is elastic, price decreases will lead to the increase in revenue and vice versa for the inelastic product.

Economics

Problems:

1)For each of the following cases, calculate the arc price elasticity of demand and state whether demand is elastic, inelastic or unit elastic

a) when the price of milk increases from $2.25 to $2.50 per gallon, the quantity demanded falls from 100 gallons to 90 gallons

b) when price of paper book falls from $7.00 to $6.50, quantity demanded rises from 100 to 150

c) when the rent on apartments rises from $500 to $550, the quantity demanded decreases from 1000 to 950 2)

2. For each of the following cases, calculate the point price elasticity of demand and state whether demand is elastic, inelastic or unit elastic. The demand curve is given by

Qd=5000-50Px

a) The price of product is $50

b) The price of product is $75

c) The price of product is $25

3. For each of the following cases, what is the expected impact on the total revenue of the firm. Explain your answer

a) Price elasticity of the demand is known to be -0.5, and the firm raises the price by 10%

b) Price elasticity of the demand is known to be -2.5, and the firm lowers the prices by 5%

c) Price elasticity of the demand is known to be 1, and the firm raises the prices by 1%

d) Price elasticity of the demand is known to be 0, and the firm raises the prices by 50%

4.The demand curve is given by

Qd=500-2Px

a) What is the total revenue function

b) The marginal revenue function is MR=250-Q

Graph the total revenue function, Demand curve and marginal revenue function c) c) At what price is revenue is maximised, What is the revnue at that point

d) Identify the elastic and inelastic portions of demand curve