# 6 elasticity and total revenue the following graph

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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 Close Explanation 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 Close Explanation 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 Close Explanation