Use the green rectangle (trian
6. Elasticity and total revenue
The following graph shows the daily demand curve for bikes in San Diego.
Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve.
Note: You will not be graded on any changes made to this graph.
Answer:
Following table shows the TotalRevenue schedule –
| Price (P) | Quantity demanded(Q) |
Total Revenue(P*Q) |
| 50 | 30 | 1,500 |
| 75 | 27 | 2,025 |
| 100 | 24 | 2,400 |
| 125 | 21 | 2,625 |
| 150 | 18 | 2,700 |
| 175 | 15 | 2,625 |
| 200 | 12 | 2,400 |
Following is the required figure-
At Point A,
Quantity demanded (Q1) = 21bikes
Price (P1) = $125 per bike
At Point B,
Quantity demanded (Q2) = 24bikes
Price (P2) = $100
Calculate the price elasticity ofdemand –
The price elasticity of demand is0.6 or 0.6 (This value can be written without negative sign aswell).
The value of the price elasticity ofdemand is less than 1. This means that demand is inelastic.
According to the mid-pointmethod, the price elasticity of demand between points A and B isapproximately 0.6.
Suppose the price of bikesis currently $125 per bike, shown as point A on the initial graph.Because the demand between points A and B is inelastic, a $25-per-bikedecrease in price will lead to decrease in totalrevenue.
In general, in order for aprice increase to cause an increase in total revenue, demand mustbe inelastic.
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