Question

Price Elasticity of Demand and Total Revenue (5 points) A. Calculate the percent change in revenue that would result in cases A−D from the previous exercise. Comment on whether you think the price change in each case is a good idea. Assume that the initial price in all cases is $100 per unit, and the initial quantity demanded is 1,000 units. B. Suppose the price elasticity of demand for milk is −0.6. If a grocer raises the price of milk by 15%, by what percentage will milk sales decrease? Will the grocer's revenue from milk sales go up or Using Formula ⇒ 5 10​=2 B \%change in demand =2% % change in price =10% ⇒ 10 2​= 5 1​c. 1% charge in demand =99% .1. change in price =0.05% ⇒ 0.05 99​​= 5 9900​=1980​The extreme case appreaching is perfectly elastic. D % change in dimand =0.05% % change in price =99%. ⇒ 99 0.05​= 9900 5​= 1980 1​The extreme case approaching is perfectly The extreme case approciching is perfectly inelastic. % change in demand =2% % change in price =10% ⇒ 10 2​= 5 1​

Answer 1

Milk sales will decrease by 9% when the price of milk is raised by 15%.

To calculate the percent change in revenue in cases A-D, we need to use the formula: Percent Change in Revenue = Percent Change in Quantity Demanded + Percent Change in Price.

Let's go through each case one by one: Case A: Percent Change in Quantity Demanded = 20% decrease (given in the previous exercise)

Percent Change in Price = 5% increase (given in the previous exercise)
Using the formula, we can calculate the percent change in revenue:
Percent Change in Revenue = -20% + 5% = -15%
In this case, the price change is not a good idea as it leads to a 15% decrease in revenue.

Case B: Percent Change in Quantity Demanded = 2% decrease (given in the previous exercise)
Percent Change in Price = 10% increase (given in the previous exercise)
Using the formula, we can calculate the percent change in revenue: Percent Change in Revenue = -2% + 10% = 8%
In this case, the price change is a good idea as it leads to an 8% increase in revenue.

Case C: Percent Change in Quantity Demanded = 1% decrease (given in the previous exercise)
Percent Change in Price = 0.05% increase (given in the previous exercise)
Using the formula, we can calculate the percent change in revenue: Percent Change in Revenue = -1% + 0.05% = -0.95%
In this case, the price change is not a good idea as it leads to a 0.95% decrease in revenue.

Case D: Percent Change in Quantity Demanded = 0.05% increase (given in the previous exercise)

Percent Change in Price = 99% increase (given in the previous exercise)
Using the formula, we can calculate the percent change in revenue: Percent Change in Revenue = 0.05% + 99% = 99.05%
In this case, the price change is a good idea as it leads to a 99.05% increase in revenue.

Moving on to part B of the question: If the price elasticity of demand for milk is -0.6 and the grocer raises the price of milk by 15%, we need to calculate the percentage decrease in milk sales.
Percent Change in Price = 15%
Price Elasticity of Demand = -0.6
Using the formula for price elasticity of demand: Price Elasticity of Demand = Percent Change in Quantity Demanded / Percent Change in Price
-0.6 = Percent Change in Quantity Demanded / 15%
Solving for Percent Change in Quantity Demanded: Percent Change in Quantity Demanded = -0.6 * 15% = -9%

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