Question

Suppose that Palestinian government raises the price of bread from NIS 4 to NIS 5 and thus

quantity demanded falls from 5,800 per week to 5,500. Calculate total revenue both before

and after the price change. Compute the price elasticity of demand for bread. What can we

tell about the price elasticity of demand for bread?

Answer 1

Price of bread increases from NIS 4 to NIS 5

The demand decreases from 5800 to 5500

The revenue before $4×5800=23200$

The revenue after

$5×5500=27500$

The elasticity of demand is therefore

$$ percentage change in demand divide by percentage change of price.

The percentage change in quantity demanded is

$\frac{Qd_2 - Qd_1}{Qd_2+Qd_1/2} =\frac {5500-5800}{5500+5800/2}×100 =-5.3$

Percentage change in price

$\frac{P_2-P_1}{P_2+P_1/{2}}= \frac{5-4}{5+4/{2}}×100=22.2$

$PE_d=\frac{-5.3}{22.2}=-0.23$

Thus the price of elasticity of demand for the bread is inelastic.