Question

The demand curve for a product is given by P = 400 - 1Q/3.

a. What is the own price elasticity of demand when price is $100? Is demand elastic or inelastic at this price? What would happen to the firm

Answer 1

Answer 2

P=400-Q/3 or Q=(400-P)*3=1200-3P

a>

When P=100 , Q=1200-3*100=900

WhenP=101 , Q=1200-3*101=897

So Elasticity=(897-900)/(101-100)=-3

Demand id elastic in this price

Revenue will increase but at a lower rate

b>When P=300 , Q=1200-3*300=300

When P=301,Q=1200-3*301=297

So Elasticity=(297-300)/(301-300)=-3

Demand id elastic in this price

Revenue will increase and at a higher rate

c>

Revenue=P*Q=400Q-(Q^2)/3

or dR/dQ=400-(2/3)Q

For revenue maximization,dR/dQ=0

so (2/3)Q-400=0

or , Q=(400*3)/2=600