The price elasticity of demand for hardback is 0.5 and the price elasticity of d
ID: 1252593 • 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
Total Revenue for Hardbacks is $20*100=$2,000 Total Cost for Hardbacks is 100*$2=$200 Profit for Hardbacks is TR-TC=$2000-$200=$1800 Total Revenue for Paperbacks is $20*100=$2,000 Total Cost for Paperbacks is 100*$2=$200 Profit for Paperbacks is TR-TC=$2000-$200=$1800 If the price elasticity of demand for hardbacks is .5 and price is increased by 10%, we must find out what happens to quantity. Price Elasticity of Demand=(% Change Quantity)/(% Change in Price) .5=(% Change in Quantity)/10 % Change in Quantity is 5% so quantity will decrease by 5% from 100 to 95. If the price elasticity of demand for paperbacks is 2 and price is decreased by 10%, we must find out what happens to quantity. Price Elasticity of Demand=(% Change Quantity)/(% Change in Price) 2=(% Change in Quantity)/10 % Change in Quantity is 20% so quantity will increase by 20% from 100 to 120. Total Revenue for Hardbacks is $22*95=$2,090 Total Cost for Hardbacks is 95*$2=$190 Profit for Hardbacks is TR-TC=$2090-$190=$1900 Total Revenue for Paperbacks is $18*120=$2,160 Total Cost for Paperbacks is 120*$2=$240 Profit for Paperbacks is TR-TC=$2160-$240=$1920 Profit increased for both goods. It will always be true that decreasing a price where a good is elastic (elasticity>1) will increase revenue. Since consumers are very price sensitive for elastic goods, the increase in quantity will always outweigh the increase in price, so the revenue will have to increase. It is also always true that increasing a price where a good is inelastic (elasticityRelated Questions
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