Question

Question 2 a. If a 10 percent increase in the price of Almar milk coses 30 percent reduction in the number of Almarai milk bottles, what is the price elasticity of demand for Almarai milk bottles? b. The demand for Almarai milk bottles is price elasticineltic/unit elastic? Will total revenue from Almarai milk bottles increase or decrease if there is price increase? Explain your answer. (4 marks)

Answer 1

Answer

A.

Price elasticity of demand

= percentage change in quantity demanded / percentage change in price

=30%/10%

=3

B.

The demand for Almarai milk bottles is elastic.

Explanation : when the price elasticity of demand less than 1, it is called inelastic demand.

If price elasticity is equals to 1, it is called unit elastic demand.

And if price elasticity is greater than the 1, it is called elastic demand.

So here price elasticity is 3, so it is elastic demand.

WILL TOTAL REVENUE FROM ALMARAI MILK BOTTLES INCREASE OR DECREASE OF THERE IS PRICE INCREASE?

ANSWER IS decrease.

Explanation

here we will take an example.

Suppose price is 10 and quantity is 100.

Now here in this example 10% change in price than price will become 10*10%=11. And quantity will decrease 30%

So 100*30%=30. So 30 will minus from 100 becomes 70 quantity.

Now we have two kind of quantity and price that is before change and after change.

Before change price and quantity is 10 and 100

After change price and quantity is 11 and 70

Now total revenue =p*Q

Before change =10*100 =1000

After change =11*70 =770.

So we can say that revenue will be decrease.