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Alexandra [31]
3 years ago
9

Suppose that over one range of​ prices, the absolute value of the price elasticity of demand varies from 15.0 to​ 2.5, and over

another range of​ prices, the absolute value of the price elasticity of demand varies from 1.5 to 0.75. What can you say about total revenue and the total revenue curve over these two ranges of the demand curve as price​ falls?
Business
1 answer:
Vera_Pavlovna [14]3 years ago
5 0

Answer:

In the first range of prices (with PED 15 - 2.5) as the price of the good or service falls, total revenue should increase. Imagine that a 1% reduction in price will result in a 15% increase in quantity demanded. The same happens when PED = 2.5, since a 1% reduction will increase quantity demanded by 2.5%.

e.g. price = $100, quantity demanded = 100, total revenue = $10,000

  • price falls to $99, quantity demanded increases to 115, total revenue = $11,385
  • price falls to $99, quantity demanded increases to 102.5, total revenue = $10,147.50

On the other range (PED = 1.5 - 0.75) as the price of the good or service falls, at first total revenue will increase but then it will decrease.

e.g. price = $100, quantity demanded = 100, total revenue = $10,000

  • price falls to $99, quantity demanded increases to 101.5, total revenue = $10,048.50
  • price falls to $99, quantity demanded increases to 100.75, total revenue = $9,974.25
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Amount of a product people purchase at various prices. ... There exists an inverse relationship between price and quantity demanded. As the price of a good or service goes up, the number sold (quantity demanded) goes down. As the price of a good or serve goes down, the number sold (quantity demanded) goes up.

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Let’s explore one by one as proposed:

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American consumers expect higher income in the future: As fights about average salary would arise between employees and companies, igniting even sindicalization, its proper to think that the same as above could occur; companies could choose to produce overseas in countries less demanding of labor rights and income, such as China provinces (I would recommend for you to watch American Factory, a awarded Netflix documentary about that subject).

Brazil experiences economic growth and increases its demand for U.S. exports: as I said in the first alternative, a country that has increased or more expensive exports could benefit from that creating more jobs, in this case decreasing the UR. If Brazil demands more US products, more has to be produced by the country, which would mean more people employed in this attractive sector.

U.S. real estate values rise: to be honest, it only affects indirectly. As housing becomes more expensive, people have to work more to be able to afford housing. That would mean they seeking better-paying jobs or in the absence of those being homeless of at least unable to buy a home. We could argue that the UR would decrease because it becomes more expensive to afford housing and hence people would migrate more but that’s a long shot rationale.  

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(FMS) Hope this helps!

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