Question

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

Q_D = 5,000 – 50 P_X

a. If the price of the product is $50.

b. If the price of the product is $75.

2) For each case, should the firm raise or lower the prices to maximize revenues? Why or Why not? Explain.

3) Suppose the income elasticity of demand is 1.5.

What impact will a recession cause for the demand for your product? Why?   Explain.

4) The cross-price elasticity of demand between your good and a related good is -3.5.

What can you determine about consumer demand for your product from this information?   Suppose the price of the related good changes by 10%?   How will this affect your sales?

Explain.

Answer 1

Cunul is given by! Demand QD - 5020 - 50 PX Now point elasticity of demand Ed = a) Now, QD = 5000-50 px dos y en los - dab =-50 dax = -50 PX QD - Now, when price of the product is $50, Qu will be Qp = 5000 - (508 50) - 2500 Hunce Ed will be tomel by substituting Px=450, Qo = 2500 and dap = -50 » in Ed= doo Pro fuce, Ed = -50* (so isoo) = -1 Now, absolute value of elasticity Ed 1=1. As jeal = 1, hence demand is unit elastic d px b Now when price of the product Px=475 them QD will be ! 1. Qo=5000 (50 875) - ), 250 Now, Ed will be found by substituting Px=$75, QD = 1250 and dao o = -50 in Ed = dopo po CS Scamsca Scanned with CamScanner

tile ed = -50* ( 75 ) ) Now, absolute value of As led l = 3 which is elasticity led 1=3 greater than 1, hence demand is elastic 22 In case (a) when l Ed 1 = 1, t han demand is amit elastic. Hunce here pucentage change in Pa becomus equal to the pucentage Change in quatity sold. Huce to tal revenue = (price x quantity) unclonged when ledl=1. - In case (6) Edl=3 which is greater than 1 bie. demand is elastic. Hince elastic change mean that it price is increased by 1%, them quantity demanded will decline by more than 1%. gnuosely, it price is in declined by 1% them quantity sold will increase by more than 1%. on this case, in creare in quantity sold will Outweigh increase in price and total revenue = (pice x quantity) will increase. Hunce in this case firm should down the price s to manimize Juevemed with CamScanner

2 As in come elasticity of demand is ! which means that income elasticity of a more than 1. Hace demand is in come. Which means that during recession, whem inc level of people falls, quantity demande decline by more than the decline in in come 1 of demand is Соц секс . Whem income & demanded will 42 The cross puce clasticity of demand between you good and related good is - 3.5. As cross-pull elasticity less than o , hence goods are patet substitute of each other which means that putut complement of each other. whic means that in crease in price of one good cause a decline in the quantity demanded for related goods, and vice vasa. I Now, if the price of the related good changes . by 10%, quantity to sold or sales will change by - 13.5 X 10%) = -35%0. ie it price of the related good in reasu by 10%, quanti sales of our good will decline by 35%. FS Scanned with CamScanner