Suppose that there are two products a and b. product a currently sells for rs 5 and demand at this price is 1700 units. if the price fell to rs 4.60 demand would increase to 2000 units. product b currently sells for rs 8 and demand at this price is 9500 units. if the price fell to 7.50 demand would increase to 1000 units. in each these cases calculate
Answers
Given : Product A currently sells for Rs. 5 and demand at
this price is 1700 units. If the price fell to Rs. 4.60 demand would increase to 2000 units.
To find : a) Price elasticity of demand
b) The effect on total revenue
Solution:
Price = 5
Demand = 1700
Price = 4.6
Demand = 2000
Change in Demand = dQ/Q = (2000 - 1700)/1700 = 300/1700 = 3/17
Change in Price = dP/P ( 4.6 - 5)/5 = -0.4/5 = -0.08
price elasticity of demand = (dQ/Q )/ dP/P =
Price elasticity of demand = (3/17) /(-0.08) = - 2.2
Effect on revenue = 2000 * 4.6 - 1700 * 5 = 9200 - 8500 = Rs 700
Revenue increased by Rs 700
Price = 8
Demand =9500
Price = 7.5
Demand = 10000
dQ/Q = 500/9500 = 1/19
dP/P = -0.5/8 = -0.0625
Price elasticity of demand = -0.842
Effect on revenue = 10000 * 7.5 - 9500 * 8 = 75000 - 76000 = Rs -1000
Revenue decreased by Rs 1000
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