Answer to Question #252271 in Economics for Hina

Question

1.     For each of the following cases, what is the expected impact on total revenue of the firm? Explain your reasoning. 12 marks

 

a.Price elasticity of demand is known to be -0.5, and the firm raises prices by 10 percent.

 

b.Price elasticity of demand is known to be -2.5, and the firm lowers price by 5 percent.

 

c.Price elasticity of demand is known to be -1.0, and the firm raises price by 1 percent.

d. Price elasticity of demand is known to be 0, and the firm raises price by the 50 percent

Answer 1

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price.

a.Price elasticity of demand is known to be -0.5, and the firm raises prices by 10 percent.

Total revenue of the firm will decrease by 5%.

 

b.Price elasticity of demand is known to be -2.5, and the firm lowers price by 5 percent.

Total revenue of the firm will decrease by 12.5%.

 

c.Price elasticity of demand is known to be -1.0, and the firm raises price by 1 percent.

Total revenue of the firm will decrease by 1%.

d. Price elasticity of demand is known to be 0, and the firm raises price by the 50 percent

A product with an elasticity of 0 would be considered perfectly inelastic, because price changes have no impact on demand. The demand will not change.