6. Elasticity and total revenue
The following graph shows the daily demand curve for bikes in Houston.
Use the green rectangle (triangle symbols) to compute total revenue at various prices along the

demand curve.
Points:
1 / 1
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Explanation:
At a price of $20
per bike,
consumers will
purchase 45 bikes
per day.
Total revenue
is
equal to price
times quantity. At
a price of $20 per
bike, you can
compute total
revenue in the
following way:
Total Revenue
Total Reve
nue
=
=
Pric
=
=
$20
per da
=
=
$90
Therefore, the first point on the total revenue curve is (20, 900). Using the same method, you can find
total revenue at each of the prices listed in the following table:
Price
Quantity
Total Revenue
(Dollars per
bike)
(Bikes)
(Dollars)
20
45
900
30
40
1,200
40
35
1,400
50
30
1,500
60
25
1,500
70
20
1,400
80
15
1,200
According to the midpoint method, the price elasticity of demand between points A and B is
approximately
.

Points:
1 / 1
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Explanation:
The
price elasticity of demand
measures the responsiveness of consumers to changes in price. For
example, if consumers change their purchasing behavior very little in response to a drastic change in
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 Qu
antity
=
=
100×
[
Q2−Q1/
((Q2+Q1/)2)]
=
=
100×
[(
40−35)/
((40+35)/2)]
=
=
100×0.1333
=
=
13.33%
You can also calculate the percentage change in price between points A and B in the following way:
Percentage Change in
Price
=
=
100×
[(P2−P1)/((P2+P1)/2)]
=
=
100×
[(
$30−$40)/(($30+
$40)/2)]
=
=
100×(−0.2857)
=
=
−28.57%
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 De
mand
=
=
Percentage Change in Quantity/Percentage Change in Price
=
=
13.33%/28.57%
=
=
0.47
Since the price elasticity of demand is less than 1, demand is inelastic between these two points.

Suppose the price of bikes is currently $30 per bike, shown as point B on the initial graph. Because the
demand between points A and B is
inelastic
, a $10-per-bike increase in price will lead to
an increase
in total revenue per day.
Points:
1 / 1
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