ECO 1104 Lecture Notes - Midpoint Method, Blackboard

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Using elasticities to calculate a change in revenue. The example we discussed in class last evening concerns a website developer who is considering increasing the price of the firm"s services from to . The firm is presently selling 12 websites per month and obtaining revenue of ,400. Since revenue is simply price times output, we know that a higher price will tend to increase revenue. At the same time, we know that a higher price will reduce output, and a smaller output will tend to decrease revenue. The answer depends on the price elasticity of demand. If demand is elastic (i. e. , the elasticity value is greater than 1), then the percentage decrease in quantity demanded will be larger than the percentage increase in price, and revenue will fall. The opposite is true if demand is inelastic. Our example used a price elasticity of demand of 1. 8; in other words,

Related Questions

38) A technological breakthrough lowers the cost of photocopiers. If the demand for photocopiers is price inelastic, we predict that photocopier sales will A) rise and total revenue will decrease. B) fall and total revenue will increase. C) rise and total revenue will increase. D) fall and total revenue will decrease. E) rise, but changes in total revenue will depend on elasticity of supply.

1. Clothing retailers often use sales, where some or all products are sold at a discount price, to increase revenue. What does this suggest about the price elasticity of demand for retail clothing?

A) It is elastic.

B) It is inelastic.

C) It is unit elastic.

D) This tells us nothing about elasticity.

2. If demand is inelastic, then increasing price will do what to revenue?

A) It is impossible to say.

B) Decrease

C) Increase

D) Nothing will happen to revenue.

3. If P increases from 200 to 202 and Qd decreases from 50 to 49, what is the price elasticity of demand? ___

4. If elasticity (i.e. price elasticity of demand) is -3, a 1.5% increase in price would lead to what change in quantity demanded?

A) a decrease of 3%

B) a decrease of 4.5%

C) an increase of 1.5%

D) an increase of 3%

5. If you know that the demand curve is given by: Q = 20-2P What is the price elasticity of demand if P = 4?

A) -0.666

B) -0.33

C) -1.33

D) -1.66

The ACME Corporation determines that at currentâ prices, the demand for its computer chips has a price elasticity of minusâ2 in the shortâ run, while the price elasticity for its disk drives is

minusâ1. If the corporation decides to raise the price of both products by 20 âpercent, what will happen to itsâ sales?

Sales of computer chips will (increase/decease) by ____ percent and sales of disk drives will (increase/decrease) by ___ percent.

What will happen to salesâ revenue?

Computer chip sales revenue will (increase/decease) by ____ percent and sales of disk drives will (increase/decrease) by ___ percent.

Can you tell from the available information which product will generate the mostâ revenue? Ifâ yes, why? Ifâ not, what additional information do youâ need?

A. Disk drives will generate the most revenue because its elasticity is the most elastic.

B. Computer chips will generate the most revenue because its elasticity is the most elastic.

C. Disk drivesDisk drives will generate the most revenue because it has a larger volume of sales.

D. We cannot tell which product will generate the most revenue because we need to know how sensitive consumers are to price changes.

E. We cannot tell which product will generate the most revenue because we need to know theâ products' initial prices and quantities.

ECO 1104 Lecture Notes - Midpoint Method, Blackboard

ECO 1104 Full Course Notes

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