Question

 On the following graph, use the green point (triangle symbol) to plot the annual total revenue when the market price is $30, $45, $60, $75, $90, $105, and $120 per bike.

 According to the midpoint method, the price elasticity of demand between points A and B is approximately _______ .

 Suppose the price of bikes is currently $30 per bike, shown as point B on the initial graph. Because the demand between points A and B is _______ , a $15-per-bike increase in price will lead to _______  in total revenue per day.

 In general, in order for a price decrease to cause a decrease in total revenue, demand must be _______ .

Answer 1

The above graph illustrates the total revenue at the mentioned prices in reference to quantity demanded.

Price ($)	Quantity	Total Revenue (dollars)
30	24	720
45	21	945
60	18	1080
75	15	1125
90	12	1080
105	9	945
120	6	720

1) According to the midpoint method, the price elasticity of demand between the points A and B is approximately -0.33

(percentage change in demand / percentage change in price)

A to B = (21-24/22.5) / (45-30/37.5) = (-3/22.5) / (15/37.5)

B to A = (24-21/22.5) / (30-45/37.5) = (3/22.5) / (-15/37.5)

where 22.5 is the average quantity between the points A and B i.e. (21+24/2) and 37.5 is the average price (30+45/2).

The midpoint elasticity of demand is known as the point where the base at which the quantity and price is the average. The point at which whether the demand is increasing or decreasing the elasticity measured is equal. If the demand moves from point A to B or B to A, the quantity and price is the average of those two points.

The point of Elasticity of demand is the method at which the base quantity measured is either at A or B point. The elasticity differs at both the points.

2) Suppose the price of bikes is currently $30 per bike, shown as point B on the initial graph. Because the demand between the points A and B is decreasing, a $15 per-bike increase in price will lead to an increase in total revenue per day.

As the price increases from $30 to $45 consumers tend to buy less and the demand decreases from 24 units to 21 units but the total revenue increases from $720 to $945 due to increase in price.

3) In general, in order for a price decrease to cause a decrease in total revenue, demand must be increasing.

As the price decreases from $30 to $15, the demand increases from 24 units to 27 units as consumer tends to buy more at the lower price but the revenue falls from $720 to $405 because the increase in demand is less than compared to decrease in price.