Question #112275

Consider the following demand function for game consoles: (D): P = 400 - 20Q

1. Assume that the price decreases from 150$ to 100$.

a. Calculate the price elasticity of demand.

b. Is the demand elastic, inelastic or unit elastic?

c. What happens to Total Revenue?

2. Assume that the price decreases from 75$ to 50$.

a. Calculate the price elasticity of demand.

b. Is the demand elastic, inelastic or unit elastic?

c. What happens to Total Revenue?

1. Assume that the price decreases from 150$ to 100$.

a. Calculate the price elasticity of demand.

b. Is the demand elastic, inelastic or unit elastic?

c. What happens to Total Revenue?

2. Assume that the price decreases from 75$ to 50$.

a. Calculate the price elasticity of demand.

b. Is the demand elastic, inelastic or unit elastic?

c. What happens to Total Revenue?

Expert's answer

Consider the following demand function for game consoles: (D): P = 400 - 20Q

1. Assume that the price decreases from 150$ to 100$.

**a.** Calculate the price elasticity of demand.

**Answer**

Inverse demand function: P = 400 - 20Q

Demand function q = 10 – 1/20 p

Quantity demanded at price $150 q1 = 10 – 1/20 × 150 = 2.5

Quantity demanded at price $ 100 q2 = 10 – 1/20 × 100= 5.0

Price elasticity of demand using **the **Midpoint** Method for Elasticity**

**Elasticity = = = -1.67**

**b.** price elasticity is > 1, the demand is elastic

**c.** Total Revenue = Price × quantity

TR= P × Q d

Initial Total Revenue= 150 × 2.5 = $375

Final Total Revenue = 100 ×5.0 = $ 500

When the price is decreased an increase in total revenue is realized.

2. Assume that the price decreases from 75$ to 50$.

a. Calculate the price elasticity of demand.

Inverse demand function: P = 400 - 20Q

Demand function q = 10 – 1/20 p

Quantity demanded at price $75 q1 = 10 – 1/20 × 75 = 6.25

Quantity demanded at price $ 50 q2 = 10 – 1/20 × 50= 7.5

Price elasticity of demand using **the **Midpoint** Method for Elasticity**

**Elasticity = = = -0.455**

**b.** price elasticity is < 1, the demand is inelastic

**c.** Total Revenue = Price × quantity

TR= P × Q d

Initial Total Revenue= 75 × 6.25 = $468.75

Final Total Revenue = 50 ×7.5 = $ 375

When the price is decreased a decrease in total revenue is realized.

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