Suppose that a local water company observes that when the price of water rises f
ID: 1203197 • Letter: S
Question
Suppose that a local water company observes that when the price of water rises from $0.10 to $0.12 per gallon, water use decreases from 50,000 to 45,000 gallons. Answer the following questions based on this observation:
A) What is the price elasticity of demand for water? Show all the steps you take to calculate it.
B) Based on your answer in part A, is the demand for water elastic or inelastic? Why? Explain in a sentence.
C) Calculate the change in total revenue caused by the increase in the price of water and state whether total revenue went up or down after the price increase. Show all steps used to find your answer.
Explanation / Answer
Elasticity of demand= % change in Qty demanded/% Change in Price
= -(change in Q/change in P)*(P/Q)
= -(5000/0.02)*(0.10/50000) = 0.5
The demand is less than unitary elastic.(inelastic) This means that 1% change in price of water will cause 0.5% change in the demand for water.
TR = P*Q = 50000*0.1 = 5000
TR = P*Q = 45000*0.12 = 5400
Price Quantity Total Revenue 0.1 50000 5000 0.12 45000 5400Related Questions
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