Question

Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. 

On the following graph, use the green point (triangle symbol) to plot the annual total revenue when the market price is $40, $60, $80, $100, $120, $140, and $160 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 $60 per bike, shown as point B on the initial graph. Because the demand between points A and B is _______ , a $20-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

Ans:

Explanation:

Total revenue  = Price * Quantity

Price ($)	Quantity ( Bikes)	Revenue ( $)
40	81	3240
60	72	4320
80	63	5040
100	54	5400
120	45	5400
140	36	5040
160	27	4320

Ans: According to the midpoint method, the price elasticity of demand between points A and B is approximately  0.47

Explanation:

Initial price ( P1) = $80

New price ( P2 ) = $60

Initial quantity ( Q1) = 63

New quantity ( Q2) = 72

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 72 - 63 ) / ( 60 - 80 ) } * {( 80 + 60 ) / ( 63 +72 )}

= ( 9 / -20 ) * ( 140 / 135)

= -0.45 * 1.0370

= - 0.47 or 0.47 ( absolute value )

Ans: Suppose the price of bikes is currently $60 per bike , shown as point B on the initial graph. Because the demand between points A and B is inelastic, a $20- per- bike increase in price will lead to increase in total revenue per day.

Ans: In general, in order for a price decrease to cause an decrease in total revenue, demand must be inelastic.

Explanation:

When demand is inelastic , then decrease in price will lead a decrease in total revenue.

When demand is inelastic , then increase in price will lead an increase in total revenue.