Answer:
To calculate the elasticity of demand, we need to use mid point elasticity theory.
According to mid point theory,
Ed = [(Q2 - Q1) / {(Q1 + Q2) / 2}] / [(P2 - P1) / {(P1 + P2) / 2}]
Where, Ed = Elasticity o demand
Q1 = Initial quantity = 100
Q2 = New Quantity = 300
P1 = Initial price = $2.75
P2 = New price = $2.25
Ed = [(300 - 100) / {(100 + 300) / 2}] / [(2.25 - 2.75) / {(2.75 + 2.25) / 2}]
Ed = - 5.
a. So, the elasticity of demand is - 5 or in absolute term 5.
b. As the value of elasticity is more than 1, that means, the elasticty over the price range in elastic.
c. From theory, we knew that, when the demand is elastic, then a decrease in price causes a increase in total revenue. Because, as the demand elasticity is elastic, so the increase in output is higher than decrease in price.
Total revenue will increase
