Question

Question 2: Elasticity and Price (8 points) $25.00 $20.00 b $15.00 $10.00 $5.00 500 S50 600 650 700 Quantity Demanded Is the demand for this product Elastic or Inelastic between points "a" and "b"? the product sells for somewhere between $15.00 and $20.00. you were the producer, would you raise your price, lower it, or keep it the same? ity and some specific numbers. Please show how you got your answer. Now If Please explain using the concept of Elastic- Page 2 Price

Answer 1

Here,      P1 = 20   Q1 = 550

               P2 = 15    Q2 = 600

PED = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

         = (600 - 550) / (15 - 20) * (20 + 15) / (550 + 600)

         = (50 / -5) * (35 / 1150)

          = 1750 / -5750

          = -0.3

The absolute value of PED is 0.3. Since PED is less than 1, it means demand for this product is inelastic.

Since demand is inelastic, 1% increase in price will lead to a less than 1% decrease in quantity demanded. So, total revenue will increase. Thus, the producer should raise its price.