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, the price elasticity of demand for good A is a. 1.50, and an increase in price will result in a decrease in total revenue for good A. b. 0.67, and an increase in price will result in an increase in total revenue for good A. c. 1.50, and an increase in price will result in an increase in total revenue for good A. d. 0.67, and an increase in price will result in a decrease in total revenue for good A.

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that,

Initial price of good A = $50

Initial quantity demanded of good A = 500 units

New price of good A = $70

New quantity demanded of good A = 400 units

Average quantity demanded:

= (New + Initial) ÷ 2

= (400 + 500) ÷ 2

= 450 units

Change in quantity demanded:

= New - Initial

= 400 units - 500 units

= -100 units

Average price level:

= (New + Initial) ÷ 2

= (70 + 50) ÷ 2

= $60

Change in price level:

= New - Initial

= $70 - $50

= $20

Therefore, the price elasticity of demand for good A is as follows:

= $\frac{\frac{Change\ in\ quantity\ demanded}{Average\ quantity\ demanded} }{\frac{Change\ in\ price}{Average\ price\ level} }$

= $\frac{\frac{-100}{450} }{\frac{20}{60} }$

= $\frac{-0.22}{0.33}$

= -0.67

Total revenue before price increase:

= quantity demanded of good A × price of good A

= 500 units × $50

= $25,000

Total revenue after price increase:

= quantity demanded of good A × price of good A

= 400 units × $70

= $28,000

Therefore, there is an increase in total revenue with increase in the price level.