Question

Can someone tell me if this is right?

Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. Total Revenue PRICE (Dollars per bike) Demand 0 4 8 12 36 40 44 48 16 20 24 28 32 QUANTITY (Bikes)

Answer 1

Midpoint method = %change in quantity/ %change in price.

change in price= p2-p1/P2+P1/2

=15-30/(30+15)/2

= -15 /22.5

. = -0.666

% change in quantity= q2-q1/q2+q1/2

= 36-32/36+32÷2

= 4/34

= 0.117

Elasticity= 0.117/ -0.666

= -0.175

= - 0.18 ( approximate)( negative sign shows the inverse relationship between price and demand)

Hence, price elasticity of demand between point A and B is 0.18.

Since elasticity is less than 1, the demand is inelastic. Thus, a $15 per bike increase in price leads to an increase in total revenue per day. Since the responsivess of demand for a price change is less, an increase in price does not affect much the quantity demanded. Hence, the total revenue increases as price increases.

In general, inorder for a price decrease to cause a decrease in total revenue, demand must be inelastic.