Respuesta :
Answer:
Option (b) is correct.
Explanation:
Given that,
Initial price of good A = $50
Initial quantity demanded of good A = 500 units
New price of good A = $70
New quantity demanded of good A = 400 units
Average quantity demanded:
= (New + Initial) ÷ 2
= (400 + 500) ÷ 2
= 450 units
Change in quantity demanded:
= New - Initial
= 400 units - 500 units
= -100 units
Average price level:
= (New + Initial) ÷ 2
= (70 + 50) ÷ 2
= $60
Change in price level:
= New - Initial
= $70 - $50
= $20
Therefore, the price elasticity of demand for good A is as follows:
= [tex]\frac{\frac{Change\ in\ quantity\ demanded}{Average\ quantity\ demanded} }{\frac{Change\ in\ price}{Average\ price\ level} }[/tex]
= [tex]\frac{\frac{-100}{450} }{\frac{20}{60} }[/tex]
= [tex]\frac{-0.22}{0.33}[/tex]
= -0.67
Total revenue before price increase:
= quantity demanded of good A × price of good A
= 500 units × $50
= $25,000
Total revenue after price increase:
= quantity demanded of good A × price of good A
= 400 units × $70
= $28,000
Therefore, there is an increase in total revenue with increase in the price level.
The price elasticity of demand for good A is 0.67, and an increase in price will result in an increase in total revenue for good.
Price elasticity of demand measures the percentage change in quantity demanded to the percentage change in the price of the good.
Price elasticity of demand = midpoint change in quantity demanded / midpoint change in price
Midpoint change in quantity demanded = change in quantity demanded / average of both demands
Change in quantity demanded = 400 - 500 = -100
Average of both demands = (400 + 500 ) / 2 = 450
Midpoint change in quantity demanded = -100 / 450 = -0.22
Midpoint change in price = change in price / average of both price
Change in price = $70 - $50 = $20
Average of both price = ($70 + $50) / 2 = $60
Midpoint change in price = 20 / 60 = 0.33
Price elasticity of demand = -0.22 / 0.33 = -0.67
Demand is inelastic. An increase in price would lead to an increase in total revenue.
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