Question

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, what is the price elasticity of demand for this good? What happens to total revenue when price increases? Show your complete work.

Answer 1

Answer:

total revenue  for 500 is $2500

total revenue  for 400 is $2800

Explanation:

given data

price of good A = $50

quantity demanded of good A = 500 units

price of good A rises = $70

quantity demanded of good A falls = 400 units

solution

we get here Elasticity of demand that is express as

Elasticity of demand = (change in quantity ÷ average quantity) ÷ (change in price ÷ average price)   .......................1

here

Change in quantity is = 400 - 500 = -100  

and average quantity is =  $\frac{400+500}{2}$ = 450

and change in price is = 70 - 50 = 20

average price is = $\frac{70+50}{2}$ = 60

so now we put all value in equation 1

Elasticity of demand  = $\frac{\frac{-100}{450} }{\frac{20}{60} }$

Elasticity of demand  = -0.67

as here the elasticity of demand is inelastic because elasticity is above -1

so about total revenue when price will increases as elasticity is inelastic

so increase in price will cause increase in revenue because revenue is maximum when elasticity = -1

and increase in price will cause increases elasticity in the absolute term and revenue will increase

total revenue = price × quantity

so

total revenue  for 500 = 500 × 5 = $2500

total revenue  for 400 = 400 × 7 = $2800