Answer to Question #107564 in Microeconomics for sawaiz

Question

when a flower shop raised the price of a floral arrangement from $20 to $28, the number of the arrangements sold decreased from 30 Units a week to 20 Units a week. What is the price elasticity of demand for the flowers in this case? How did the shop's total revenue change as a result of this?

Answer 1

Price elasticity of demand (PED) is the percentage change in quantity demanded of a commodity due to certain percentage change in its price.

PED = %change in quantity demand/%change in price

Mid point of quantity = $(Q1 + Q2)/2$ = (30 + 20)/2 = 25

Mid point of price = $(P1 + P2)/2$ = (20 +028)/2 = 24

%change in quantity = $(Q2 - Q1)/Mid point quantity$ = (20 - 30)/25 = -0.4

%change in quantity = $(P2 - P1)/Mid point price$ = (28 - 20)/24 = 0.3

Price Elasticity of Demand = -0.4/0.3 = 1.3

Total Revenue (TR) = $Total Quantity * Price per unit$

Initial TR = $Q1 * P1$ = 30 * 20 = 600

Present TR = $Q2 * P2$ = 20 * 28 = 560

The total revenue of the firm dropped from $600 to $560