Question

14. Assume the following demand function: Q 400-AP Find the price range where leg 1-1 and where IEDI At P- $700 4) What is demand? (ii) What is ? (ii) Using ep, what would you expect to happen to demand if this firm raised price by a. 1 b. 7%? (fall by what %) (iv) What would you expect to happen to total revenue if this firm raised price by 7% (go up or down and why)

Answer 1

14.

a Ed is less than 1 at the price range of 0 to 549

Ed is greater than 1 at the price range of 550 to 1000

P	Q	P	Q	Ed
0	400
50	380	#DIV/0!	-5.00%	#DIV/0!
100	360	100.00%	-5.26%	-0.053
150	340	50.00%	-5.56%	-0.111
200	320	33.33%	-5.88%	-0.176
250	300	25.00%	-6.25%	-0.250
300	280	20.00%	-6.67%	-0.333
350	260	16.67%	-7.14%	-0.429
400	240	14.29%	-7.69%	-0.538
450	220	12.50%	-8.33%	-0.667
500	200	11.11%	-9.09%	-0.818
550	180	10.00%	-10.00%	-1.000
600	160	9.09%	-11.11%	-1.222
650	140	8.33%	-12.50%	-1.500
700	120	7.69%	-14.29%	-1.857
750	100	7.14%	-16.67%	-2.333
800	80	6.67%	-20.00%	-3.000
850	60	6.25%	-25.00%	-4.000
900	40	5.88%	-33.33%	-5.667
950	20	5.56%	-50.00%	-9.000
1000	0	5.26%	-100.00%	-19.000

b. At P = $700,
(i) Demand, Q = 400-0.4*700 = 120

(ii) Ed is the Elasticity demand which shows how sensitive is a good for a price change. It is the ratio of % change in Q to % change in P

(iii) For a 7 percent increase in price the quantity demanded falls by 16 percent, which is shown in the below table

(iv) For a 7 percent increase in price the total revenue decreases because of being price sensitive

P	Q	P	Q	Ed	TR
600	160
650	140	8.33%	-12.50%	-1.50	91000
700	120	7.69%	-14.29%	-1.86	84000
750	100	7.14%	-16.67%	-2.33	75000