Question

If the demand curve for bread is given as Q = 300 - 16p, (5 marks)
a. What is the point elasticity of demand when price is 1.50?
b. What will be your pricing decision if you want to increase total revenue? To increase
or decrease price?

Answer 1

a) Point elasticity of demand is given by :-

$-\frac{dQ}{dP}\times \frac{P}{Q}$

Differentiating Q with respect to p we get

$\frac{dQ}{dp} = -16\\ Given \\p = 1.50$

Substituting this value of p in the demand equation we get

$Q=300-16(1.5)=300-24\\ Q=276$

 

Therefore, elasticity

$= - (-16 × \frac{1.50}{276}) = 0.09 (approx.)$

b) Here value of elasticity of demand if less than 1, thus implying that demand is inelastic. This means that even if price rises by a large value, change in quantity demanded will be very small. Hence, in order to increase total revenue appropriate decision would be to increase price. In such a case, quantity demanded won't fall much and as such, the firm will be able to enjoy a higher revenue.