Question

Question 2 The schedule below shows the number of packs of candy bought in a candy shop at a variety of prices. Price of candy ($/pack) 4 3 Number of packs purchased per day 300 600 900 1200 1500 (a) Determine the price elasticity of demand for candy when the price of candy increases from $2 to $3 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases. (6 marks) (b) Determine the price elasticity of demand for candy when the price of candy increases from $4 to $5 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases. (6 marks) (c) Based on your answer in (a) and (b), explain the relationship between the total revenue and the price elasticity of demand for candy. (8 marks) (d) A consultant suggests to the shop owner to set the price of candy at $3 in order to maximise profit. Do you agree? Explain. (10 marks)

Answer 1

We calculate the price elasticity as follows:

Mid point fomula to calculare price clasticity .81/[(8,+Q2/2] (P. - P.) / [(P, + P₂) 12] (a) Here, 8 = 1200 &a=900 P = $2 P = $3 Cp + (900-1200) / [(900 +1200)/2) (2-3) / [(2 + 3)/2] +300 / (2100/2) +1 / (5/2) 300/1050 - S = 0.714 225 7 (6) hese, 8 = 600 - Q2 = 300 P = $4 L - $5. ep. (300-6002/[(300+600)/2 ) (4-5) 1(4+5)/2 - 300/450 – 3 -1 / 19/2)

a. The product is inelastic. The demand won't change as much if there is an increase in price. The total revenue will rise almost in proportion with the rise in price.

b. The product is elastic. The demand will fall more than the increase in price. We will not see an increase in the total revenue.