1. For each of the following absolute values of price elasticity of demand, indi

Question

1. For each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue If a firm ralsed its price in each elasticity range identified Absolute ValueElasticity Effect of Price Increase a) E 2.5 b) Eo 1.0 d ED 0.8 2. Table 5.3 shows the quantity supplied and the quantity demanded for restaurant meals at different prices. Use the in formation in the table below to calculate the value of the price elasticity of demand for restaurant meals and explain the answer. Restaurant Meals Quantity Supplied 100 150 Quantity Demanded 200 150 Price $10 $20

Explanation / Answer

Answer:

Qn.1)

Small Change in Price leads to big change in quantity demanded.

Qn.2)

Price Elasticity of Demand calculated by finding the value of  percentage Change in Quantity Demanded / Percentage Change in Price.

Here, Change in Quantity Demand = (150-200) / 200 = - 0.25

Price increases from $10 to $20. Therefore %change = (20-10) / 10 = 1.

Thus,

Price Elasticity of Demand = -0.25 / 1 = -0.25.

Demand is inelastic in nature (where the percentage change in price leads to a smaller change in quantity demanded.)

Absolute Value Elasticity Effect of Price Increase a) ED = 2.5 Relatively Elastic

Small Change in Price leads to big change in quantity demanded.

b) ED = 1.0 Unitary Elastic Proportionate Change in Price Level leads to Proportionate Change in Quantity Demanded. c) ED = Perfectly Elastic Little Change in Price Leads to an Infinite Change in Quantity Demanded. d) ED = 0.8 Relatively Inelastic A proportionate Change in Price leads to a less proportionate Change in Quantity Demanded.

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