Answer to Question #248641 in Macroeconomics for Steven Su

Question

Assume the price of apples increases from $20 to $25 and quantity demanded falls from 10 to 5 tons

Answer 1

Use the total revenue test to determine if the demand is relatively elastic or relatively inelastic.

Total revenue (TR) is calculated by multiplying price (P) per unit and quantity (Q) of the good sold. The total revenue test is a method of estimating the price elasticity of demand.

If total revenue increases as price decreases then demand is elastic.

If an increase in price causes a decrease in total revenue, then demand can be said to be elastic, since the increase in price has a large impact on quantity demanded.

TR1=$20x10000kg=200000$

TR2=$25x5000kg=125000$

Ans. Demand can be said to be elastic.