Question

Question 1 (12 marks) Suppose the following is the demand equation of the famous flower shop, Brighten in Hong Kong and the current price charged by Brighten is $600 for a bunch of roses: Qd = 5000 - 2P where P is the unit price of a bunch of roses and Qd is the quantity demanded (in bunch of roses) (a) Use the midpoint method to calculate the price elasticity of demand if Brighten decreases the unit price of a bunch of roses from $600 to $400. Show your workings. (Round your answer in two decimal places). (5 marks) (b) identify the type of price elasticity of demand and explain briefly whether you support the price adjustment of Brighten based on your findings in (a) from the perspective of Brighten.(7 marks)

Answer 1

Demand Curve Qd=5000-2p

a)Quantity demanded for 600$=5000-2(600)= 3800     Quantity demanded for 400$=5000-2(400)= 4200

Price Elasticity of demand (PED)= % change in quantity demanded / % change in price

% change Quantity= Q2-Q1/ Q1 =4200-3800/3800= 10.52%

%change in Price=P2-P1/P1= -33.33%

PED= 10.52%/33.33%= -31.56%

2500 600 3800 4200

b.) Looking into the above findings we can see that the price elasticity of demand is negative, this means the product is elastic, it follows the laws of demand. The means for every % increase in price the quantity of the product demanded decrease by half percentage. there is a signifacnt change in the quantity demanded by the fall in price hence i support the change in price.