Elasticity of Demand and Total Revenue
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1.Choose one of the items that has elastic demand. Show how much sales can increase if the firm lowers its price by 6%.
2. Choose one of the items that has inelastic demand. Show how much sales can increase if the firm lowers its price by 12%.
3. Using the relationship between elasticity and revenue, explain whether the firms in questions 1 and 2 should lower their price
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Solution Summary
Effect of a change in P on Total Revenue if demand is elastic or inelastic.
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1- I choose Fruits which have an elasticity of demand of -3.02.
Elasticity = %change in Quantity Demanded / % change in price
==> -3.02 = % change in Qd / -6%
==> % change in Qd = (-3.02) (-6%) = +18.12%
==> sales increase by 18.12% when the firm lowers the price of Fruits by 6%.
2- I choose Eggs which have a elasticity of demand of -0.26
Elasticity = %change in Qd / % change in ...
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