Question

According to the midpoint method, the price elasticity of demand between points A and B is approximately . Suppose the price of bikes is currently $15 per bike, shown as point B on the initial graph. Because the demand between points A and B is , a $15-per-bike increase in price will lead to in total revenue per day. In general, in order for a price decrease to cause a decrease in total revenue, demand must be _____

Answer 1

With an inelastic demand between points A and B, a $15 increase in bike price leads to higher total revenue as the quantity demanded changes less proportionately to price. For a price decrease to lower total revenue, demand must also be inelastic.

Step-by-step explanation:

According to the midpoint method, if the price changes by 1%, the quantity demanded will change by 0.45%. This relationship indicates that the price elasticity of demand between points A and B is less than one, suggesting that the demand is inelastic. Therefore, a $15-per-bike increase in price will lead to an increase in total revenue per day because the percentage decrease in quantity demanded will be smaller than the percentage increase in price.

In general, for a price decrease to cause a decrease in total revenue, demand must be inelastic. This is because with inelastic demand, the percentage change in quantity demanded is less than the percentage change in price, so lowering prices will result in a less than proportionate increase in quantity demanded, which could lead to a decrease in total revenue.