Because the demand between points A and B is inelastic, a $25-per-bike increase in price will lead to an increase, in total revenue per day.
in order for a price decrease to cause a decrease in total revenue, demand must be inelastic.
<h3>What is the price elasticity of demand? </h3>
Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.
When the coefficient of elasticity is less than one, it means that demand is inelastic. When demand is inelastic, it means that the quantity demanded is not sensitive to changes in price.
Price elasticity of demand = midpoint change in quantity demanded / midpoint change in price
Midpoint change in quantity demanded = change in quantity demanded / average of both demands
- change in quantity demanded = 40 - 35 = 5
- Average of both demands = (40 + 35) / 2 = 37.50
- Midpoint change in quantity demanded = 5 / 37.50 = 0.133
Midpoint change in price = change in price / average of both price
- Change in price = 100 - 125 = -25
- Average of both prices = (100 + 125) / 2 = 112.50
- Midpoint change in price = -25 / 112,50 = -0,222
Midpoint elasticity of demand = 0.133 / -0,222 = 0.6
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