Question

A local council raises the price of car parking from E3 per day to {5 per day and finds that usage of car parks contracts from 1,200 cars a day to 900 cars per day.
Calculate the price elasticity of demand for this price change and calculate whether total revenue from the car park rises or falls

Answer 1

Percentage change (price) is given by

$(5-3)=2$

$\frac{2}{3}×100$%$=66.67$%

Percentage change in demand is given by,

$(900-1200)= -300$

$\frac{-300}{1200}×100$%$=-25$%

Price elasticity of demand is

$\frac{-25}{66.67}=-0.3750$

Therefore demand is price inelastic

Total revenue

Revenue at £ 3 per day is

$£3×1200=£3600$

Revenue at £5 per day is

$£5 ×900=£4500$

Therefore; revenue rises when the price elasticity of demand is less than one and this makes business raise their selling price.