The price elasticity of demand for hardback is 0.5 and the price elasticity of d
ID: 1252482 • Letter: T
Question
The price elasticity of demand for hardback is 0.5 and the price elasticity of demand for paperback is 2. Suppose the publisher increases the price for hardback by 10% and decreases the price of paperback by 10%. Complete the following table. Does price discrimination increase or decrease the publisher’s profit?
Price
Quantity
Total Revenue
Total Cost
Profit
Hardback
$20
100
Paperback
20
100
Total
200
Price
Quantity
Total Revenue
Total Cost
Profit
Hardback
$20
100
Paperback
20
100
Total
200
Explanation / Answer
Price elasticity of demand = % change in Quantitiy Demanded/ % change in price In the question above you are trying to figure out the new quanity demanded and price. If the publisher increases the price for hardback by 10%, the equation than becomes (%change in Price)(Price elasticity of demand) = (%change in quantity demanded) (.1)(.5) = %change in quantitiy demanded Multiply the new price by the new quantiy to get the new total revenue. Subtract the old revenue from the new revenue to get the total cost profit. If the publisher decreases the price of paperback by 10%, the equation than becomes (%change in Price)(Price elasticity of demand) = (%change in quantity demanded) (-.1)(2)= % change in quantity demanded Follow the same steps as before Compare the old revenue to the new revenue.
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