Data for the market for graham crackers is shown below. Calculate the elasticity
ID: 2703020 • Letter: D
Question
Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices.
Price of crackers
Quantity Demanded (per month)
$3
80
$2.5
120
$2
160
$1.5
200
$1
240
$1.00 - $1.50: ___________________________________
$1.50 - $2.00: ___________________________________
$2.00 - $2.50: ___________________________________
$2.50 - $3.00: ___________________________________
If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity. Please show and explain all work.
Also is elasticity always represented as % and what is best higher or lower numbers and why
Price of crackers
Quantity Demanded (per month)
$3
80
$2.5
120
$2
160
$1.5
200
$1
240
Explanation / Answer
elasticity = (p/Q)*(dQ/dp)
$1.00 - $1.50: =(1.25/220)*(-40/.5) = -.45
$1.50 - $2.00: = (1.75/180)*(-40/.5) = -.77
$2.00 - $2.50: = (2.25/140)*(-40/.5) = -1.28
$2.50 - $3.00: (2.75/100)*(-40/.5) = -2.2
here at P = $2.5, elasticity is between (-infinity,-1) so it is relatively elastic.
relatively elastic is when the percentage change in quantity demanded is greater than the percentage change in price (so that Ed < - 1).
under relative elastic condition an decrease in price will increase the revenue upto a limit when elasticity will become unit elastic.
so at $2.5 firm should decrease the price to increase revenue
suppose firm decrease the price to 2.25 from $2.5
revenue at $2.5 = 2.5*120 = 300
revenue at 2.25 = 2.25*140 = 315
revenue at 2 = 2*160 = 320
revenue at 1.75 = 1.75*180 = 315
if we look at the above calculation revenue was increasing till P = $2 after that it started decreasing,
elasticity is ratio of percentage change in quantity to percentage change in price
e = (dQ/Q)/(dP/P)
the best no is -1 when elasticity is unit elastic or 1% at which revenue iss maximized.
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