11) Discuss fully the determinants underlying price elasticity of demand. 12) Se

Question

11) Discuss fully the determinants underlying price elasticity of demand.

12) SeeClear T.V., a cable hook-up, used to sell its service for $22.00 a month and it managed to sign up 42,000 customers. Due to increased equipment costs and the stock-holders' desire to increase profits, the company raised the price to $28.00 a month. In reaction, 2,500 customers canceled their subscriptions. Calculate the price-elasticity of demand for this product. Show the formula for calculating price elasticity of demand and how you calculated your results. What happened to total revenue and why?

Explanation / Answer

Price elasticity of demand = % change in quantity / % change in price

% chnage in price = (28-22)/22 = 27.27%

% chnange in quantity = (39500-42000)/42000 = 5.95% , ignore -ve sign

Thus,

price elasticity of demand = 5.95% / 27.27% = 0.218

Total revenues at price of $22 = 22*42000 = $924,000

Total revenues at price of 28 = 28*39500 = $1,106,000

change in revenues = 19.70% due to the higher increase in price than the decline in volume sold.

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