Question

The following graph shows the daily demand curve for bikes in San Diego.

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 $ 125 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 an increase in total revenue, demand must be _______ 

Answer 1

1. Price elasticity (using midpoint method)

We know that Price Elasticity of Demand=percent change in quantity/percent change in pricePrice

From the midpoint formula we know that

percent change in quantity=Q2−Q1/(Q2+Q1)÷2×100

percent change in price=P2−P1/(P2+P1)÷2×100

From the above example = percent change in quantity = 48-42/(48+42)/2*100

=13.33

percent change in price = 100-125/(100+125)/2*100

= -22.22

Then, those values can be used to determine the price elasticity of demand:

Price Elasticity of Demand= 13.33/-22.22

= -.6

2. .6 , will lead to decrease in total revenue per day.

3. Remain constant