Question

1. In the following table, for which item (s) raising and for which item (s) lowering price would increase/decrease revenue(s) for the sellers?

Table 1

Items	Price elasticity of demand	Increase/decrease revenue
Vodka	1.8
Table salt	0
Perfume	-2.0
Sugar	-0.8

A. Suppose the price elasticity of demand for Honda Civic to a group of buyers is -1.2. Is demand for Honda Civic price elastic or inelastic?

B. Refer to previous question. Will total revenue for the dealer increase or decreases following a 10% discount on Honda Civic? Explain.

1. Some of the determinants of price elasticity of demand are:

1. availability of substitutes, cost relative to benefit, and scope of market.
2. availability of substitutes, degree of necessity, cost relative to income, scope of market, and adjustment time.
3. availability of complements, cost relative to income, and scope of market.
4. availability of complements, cost relative to income, scope of demand, and adjustment time.

2. When the price of a bar of chocolate is $1.00, demand is 100,000 bars. When the price rises to $1.50, demand falls to 60,000 bars. The price elasticity of demand using the mid-point method is (circle one)                     

-1.25                1.25/                 -1.2/                 1.2.

   

Answer 1

Effect of a discount
Items	Price elasticity of demand	Increase/decrease revenue	Elastic/Inelastic
Vodka	1.8	Increase in Revenues	Elastic
Table salt	0	Decrease	Inelastic
Perfume	-2	Increase in Revenues	Elastic
Sugar	-0.8	Decrease in Revenues	Inelastic
A fall in price will increase revenues if the demand is ELASTIC
A fall in price will decrease revenues if the demand is INELASTIC
If the elasticity of demand is greater than 1 we say the demand is Elastic
If the elasticity is less than 1 we say the demand is INELASTIC
If Ed = 1 then we say the demand is unit elastic

Some of the determinants of price elasticity of demand are availability of substitutes (higher no of substitutes being available will mean the higher elasticity and vice versa), degree of necessity (Necessities will have lower elasticity as they will be bought irrespective of rise/fall in demand), cost relative to income (higher % of income spent on a good will mean the demand will be elastic and vice versa) , scope of market, and adjustment time (if the demand can be postponed, the elasticity will be higher and vice versa).

When the price of a bar of chocolate is $1.00, demand is 100,000 bars. When the price rises to $1.50, demand falls to 60,000 bars. The price elasticity of demand using the mid-point method is -1.25

	P	Q	Change in P	Change in Q	Average P	Average Q	Ed
	1	100000
	1.5	60000	0.5	-40000	1.25	80000	-1.25
	Ed midpoint = (Change in Q/Change in P)*(Average P/Average Q)

1.