Question

Price	Q	Elasticity
$       5.00	100
$       4.75	140	6.50
$       4.50	180	4.63
$       4.25	220	3.50
$       4.00	260	2.75
$       3.75	300	2.21
$       3.50	340	1.81
$       3.25	380	1.50
$       3.00	420	1.25
$       2.75	460	1.05
$       2.50	500	0.88
$       2.25	540	0.73
$       2.00	580	0.61

Elastic from $5.00 to $2.75

Inelastic from $2.50 to $2.00

Question?

c)

The demand is unit elastic at some price between ____ and _____

d) are there prices between $2 and $5 which you are certain the company should not charge based on the elasticities you observe? Assume your ice cream must be priced in $.25 increments

The company should not charge below _____

e) if the goal of this firm was to maximize revenue, what price would you recommend they charge for a pint of ice cream? Use functions and Excel's solver functionality

Price (P) =

Quantity (Q)=

Revenue=

Answer 1

Given the information, the demand is unit elastic at some price between $2.75 and $2.50.

If the demand is inelastic (elasticity < 1), an increase in price leads to an increase in total revenue, and a decrease in price leads to a fall in total revenue. If the demand is elastic (elasticity > 1), an increase in price will result in a decrease of the total revenue, while a decrease in price will result in an increase in the total revenue. So, the company should not charge a price less than $2.75, as this will reduce the total revenue.

To maximize total revenue the firm should charge $2.75 for a pint of ice-cream. Total quantity is then 460 and total revenue is $1,265.00.

Price	Quantity	Elasticity	Total Revenue
5.00	100		500.00
4.75	140	6.50	665.00
4.50	180	4.63	810.00
4.25	220	3.50	935.00
4.00	260	2.75	1,040.00
3.75	300	2.21	1,125.00
3.50	340	1.81	1,190.00
3.25	380	1.50	1,235.00
3.00	420	1.25	1,260.00
2.75	460	1.05	1,265.00
2.50	500	0.88	1,250.00
2.25	540	0.73	1,215.00
2.00	580	0.61	1,160.00