Question

suppose the following is the demand equation of the famous flower

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

a)

demand at $600. = 5000-2P = 5000 - 2(600) = 5000-1200 = 3800. New demand at $400. Qd3 5000 - 2(400) = 5000 - soo s room. 4200. Now, we know:- 2.-3600, 02 = Alus 42.00 Pi = 600, P2 = 400. percent percent change chang in quantity: - Q2- X100. 2 4200-3800 x 100 14200+3850) 10 400 8000 = 10% xloo 4000 Percent change in Price : P2-PX100 LID I = -200 l =-40%. -200 xloo Γυυυ) 1 2 50* Price elasticity of Demans : peccent change ing. percent change in p. 10 -0.25. - -40

b)

Price elasticity of demand between these two points is -0.25. A value less than 1 would mean that demand is inelastic. Since, elasticites are always taken as positive values we'll consider absolute value of the price elasticty and consider it 0.25%. This means that if price changes by 1%, quantity demanded will change by 0.25%. A change in price of the good will lead to smaller change in the quantity demanded of the good.

I would not support the price adjustment made by Brighten. Because for an inelastic demand change in quantity demanded is very less as a result of change in price of the good.

In case of inelastic demand, if the price of the good is lowered, like in this case, the quantity demanded does not change much. This will lead to loss in total revenue for the firm. Thus, firms facing inelastic firm should not reduce prices as there is no economic benefit in doing so.

On the other hand, we Brighten decided to increase it's prices, and as we know in case of inelastic demand, demand of the product does not change much with respect to price, thus, this will lead to generation of more profit for the firm because of higher prices and almost static quantity demanded.

Hence, I do not support the price adjustments made by Brighten.