Assume that the price of a product increases from $9.50 to $10.50 and this causes the quantity demanded to drop from 2,050 units to 1,950 units.

A. calculate the total revenue at each price level.
B. calculate the price elasticity of demand between these two points.
C. Is this demand elastic or inelastic?

a.

Total revenue at a price of $9.5 per unit is $19475 while the total revenue at a price of $10.5 per unit is $20475

b.

The PED is -0.46

c.

The demand for the product is price inelastic as the PED (0.46) is less than 1.

Explanation:

a.

Total revenue is a function of price multiplied by quantity.

Total revenue at price $9.5 =  9.5 * 2050  = $19475

Total Revenue at price $10.5 =  10.5 * 1950  = $20475

b.

The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. Price elasticity of demand (PED) can be calculated using the following formula,

PED = % Change in Quantity demanded / % Change in price

PED = [ (1950 - 2050) / 2050 ]  /  [ (10.50 - 9.50) / 9.50 ]

PED = -0.46

c.

The negative sign represents the normal (inverse) relationship between price and quantity demanded.

The demand for a good is price inelastic when its PED is less than 1 while the demand for a product is price elastic when its PED is more than 1.

As the product's PED is 0.46 which is less than 1, the demand for the product is price inelastic.

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