you may use graphs if you wish, but they are not required. Question 1 In the mar

Question

you may use graphs if you wish, but they are not required. Question 1 In the market for bikes, when the price is $1000, consumers demand five hundred units. Suppose that the price of bikes falls by $100, and the quantity demanded subsequently increases by 100 units. Explain whether the following statements are true, false, or uncertain: At the initial price, for the change described, demand for bikes is unitary elastic. At the new price, if the price of bikes fell again, demand for bikes would be more elastic than in part (a). If the price of bikes rose above $1000, then at that new price, demand for bikes would be unitary elastic.

Explanation / Answer

For Elasticity co-efficient, there are certain rules. ElasticityCoefficient Price Increase Price Decrease greater than 1 TR Decrease TR Increase = 1 TR No change TR No change less than 1 TR Increase TR Decrease Greater than 1 is Elastic. Equals to 1 is unitary elastic. Less than 1 means inelastic. Let us see your question case a At the initial price, for the change described, demand for bikes isunitary elastic. False. Total revenue = 1,000 * 500 units = 500,000 Total revenue = 900 * 600 units = 540,000 By looking in to the table I provided, Price decrease, TR increase which means > 1 , that iselastic.SO, it is not unitary elastic in this case. Case b False. It would be elastic, but not more than case a becauseincrease in TR rate is not as big as in case a. Case C Elastic. Because when there is a price increase, demand decreasesand TR decreases.Please take a look in the table. price increase, demand decrease and TR decrease ---- then it isgreater than 1 which means elastic.

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