Price demand is said to be inelastic if consumers

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price, demand is said to be inelastic; if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity demanded between points A and B in the following way: Percentage Change in Quantity Percentage Change i n Quantity = = 100× Q2−Q1Q2+Q12 100×Q2−Q1Q2 +Q12 = = 100× 54−4854+482 100×54−4854+4 82 = = 100×0.1176 100×0.1176 = = 11.76% 11.76% You can also calculate the percentage change in price between points A and B in the following way: Percentage Change in Price Percentage Change in Price = = 100× P2−P1P2+P12 100×P2−P1P2+P12 = = 100× $10−$20$10+$202 100×$10− $20$10+$202 = = 100×(−0.6667) 100×−0.6667 = = −66.67% −66.67% The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price (ignoring the negative sign): Price Elasticity of Demand Price Elasticity of Demand = = Percentage Change in QuantityPercentage Change in Pric e Percentage Change in QuantityPercentage Change in Price = = 11.76%66.67% 11.76%66.67% = = 0.18 0.18 Since the price elasticity of demand is less than 1, demand is inelastic between these two points. Suppose the price of bikes is currently $10 per bike, shown as point B on the initial graph. Because the demand between points A and B is Error! Filename not specified. elastic , a $10-per-bike increase in price will lead to Error! Filename not specified. an increase in total revenue per day.
Points: 0.5 / 1 Close Explanation Explanation: Recall that the price elasticity of demand between points A and B is 0.18. This means that the elasticity between these two points is less than 1. Therefore, demand is inelastic between these two points. Total revenue is equal to price times quantity. When price increases by $10 per bike, quantity demanded decreases from 54 to 48 bikes per day, and total revenue rises from $540 to $960 per day. Holding everything else constant, an increase in price will increase total revenue, but a decrease in quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect is that total revenue rises. In general, in order for a price decrease to cause a decrease in total revenue, demand must be Error! Filename not specified. inelastic . Points: 1 / 1 Close Explanation

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