The following graph shows the market for widgets in a local hardware store.

a) identify whether the price of widgets from $8 to $7 is elastic, unit elastic, or enelastic. Explain.

b) what is the price of widgets that maximize the hardware store’s revenue? Explain.

c) The price of widget is $9. If the hardware store wants to increase its revenue, how should it change the price? Explain.

d) using the midpoint formula, calculate the price elasticity of demand for widgets when price increases from $7 to $8. Identify the coefficient as elastic, unit elastic or inelastic.

e) using the midpoint formula, calculate the price elasticity of demand for widgets when price decreases from $6 to $5. Identify the coefficient as elastic, unit elastic or inelastic.

f) based on the scenario in part E, how does the decrease in price affect the hardware store’s revenue?

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topeadeniran2 topeadeniran2 · Answer 1 · 2022-07-26T02:16:53+02:00

The fall in price leads to a rise in total revenue, which means demand is elastic

a. Price of widgets= $8

Total revenue= P*Q= 8*12= $96

Price= $7

Total revenue= 7*16= $112

A fall in price leads to rising in total revenue, which means demand is elastic.

b. Price=$7 maximizes the total revenue. Total revenue when price=$7, total revenue= Price* quantity= $7*12=$112.

c. When the price is equal to $9, the demand is elastic. So there should be a decrease in price in order to increase total revenue.

d. Price elasticity of demand= ((96-112)/(112+96)/2)) ÷((8-7)/(8+7)/2))

= -2.14

This is an elastic demand.

e. When price=$6, Quantity=18

When Price=$5, Quantity= 20

Price elasticity of demand= ((20-18)/(20+18)/2)) ÷((5-6)/(5+6)/2))

= - 0.58

This is a inelastic demand.

f. Total revenue falls from $108 to $100 when the price falls from $6 to $5.

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