Question

6. Elasticity and total revenue

The following graph shows the daily demand curve for bikes in New York City.

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.

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

Suppose the price of bikes is currently $ 200 per bike, shown as point A on the initial graph. Because the demand between points A and B is  _______ , a $ 25-per-bike decrease in price will lead to _______  in total revenue per day.

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

Answer 1

PRICE ( Dollars per bike )	TOTAL   REVENUE (Dollars)
50	5000
75	6750
100	8000
125	8750
150	9000
175	8750
200	8000

Answer of first blank : 1.664

Explanation:

Price elasticity between point A and B ;

PED = $(\Delta Q/\Delta P) * [(P1 + P2) / (Q1+ Q2)]$

= { ( 50 - 40 ) / ( 200 - 175 ) } * { ( 200 + 175 ) / ( 40 + 50 ) }

= (10 / 25 ) * ( 375 / 90 )

= 0.4 * 4.16

= 1.664

Answer of second blank: elastic

Answer of third blank : increase

Answer of fourth blank : elastic

9000 8000 7000 6000 w 5000 4000 3000 2000 1000 TR 50 100 150 200 250 PRICE (Dollars per bike )