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    Elasticity of Demand Problems With Solutions

    Uploaded by

    Faraz Siddiqui
    The document provides the formula to calculate price elasticity of demand (E) and uses it to solve two problems: 1) It calculates the effect on revenues of raising train fares from £10 to £14 for 1000 daily passengers with a price elasticity of -0.15. Revenues increase from £10,000 to £13,314 so the fare rise should be accepted. 2) It calculates the quantity and revenues from lowering the price of toy cars from Rs. 800 to Rs. 650 given a demand elasticity of -1.5 and estimated sales of 10,000 at Rs. 800. Quantity sold rises to 13,673 and revenues increase from Rs. 80,00,000 to

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    Elasticity of Demand Problems With Solutions

    Uploaded by

    Faraz Siddiqui
    2K views3 pages
    The document provides the formula to calculate price elasticity of demand (E) and uses it to solve two problems: 1) It calculates the effect on revenues of raising train fares from £10 to £14 for 1000 daily passengers with a price elasticity of -0.15. Revenues increase from £10,000 to £13,314 so the fare rise should be accepted. 2) It calculates the quantity and revenues from lowering the price of toy cars from Rs. 800 to Rs. 650 given a demand elasticity of -1.5 and estimated sales of 10,000 at Rs. 800. Quantity sold rises to 13,673 and revenues increase from Rs. 80,00,000 to

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    Elasticity of demand Problems with solutions

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    The document provides the formula to calculate price elasticity of demand (E) and uses it to solve two problems: 1) It calculates the effect on revenues of raising train fares from £10 to £14 for 1000 daily passengers with a price elasticity of -0.15. Revenues increase from £10,000 to £13,314 so the fare rise should be accepted. 2) It calculates the quantity and revenues from lowering the price of toy cars from Rs. 800 to Rs. 650 given a demand elasticity of -1.5 and estimated sales of 10,000 at Rs. 800. Quantity sold rises to 13,673 and revenues increase from Rs. 80,00,000 to

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views3 pages

    Elasticity of Demand Problems With Solutions

    Uploaded by

    Faraz Siddiqui
    The document provides the formula to calculate price elasticity of demand (E) and uses it to solve two problems: 1) It calculates the effect on revenues of raising train fares from £10 to £14 for 1000 daily passengers with a price elasticity of -0.15. Revenues increase from £10,000 to £13,314 so the fare rise should be accepted. 2) It calculates the quantity and revenues from lowering the price of toy cars from Rs. 800 to Rs. 650 given a demand elasticity of -1.5 and estimated sales of 10,000 at Rs. 800. Quantity sold rises to 13,673 and revenues increase from Rs. 80,00,000 to

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Formula to calculate Price Elasticity of demand

    E = Q2 – Q1 X P2 + P1
    P2 – P1 Q2 + Q1

    Problem 1: The Serpell Report on Railway finances in England, measured the price
    elasticity of demand for rail services on some routes to be fairly inelastic (-
    0.15); hence suggested fares rise of 40 Percent for London Commuters. In this
    case work out the revenue effect if fare is raised from £10 to £14 and daily
    1000 passengers are traveling on this route. Should the authorities accept this
    suggestion?

    Solution
    E = Q2 – Q1 X P2 + P1
    P2 – P1 Q2 + Q1

    -0.15 = Q2 – 1000 X 14+10


    14-10 Q2 + 1000

    - 0.15 (Q2 + 1000) = 6 (Q2 – 1000)


    6000 – 150 = 6.15 Q2
    Q2 = 951

    Revenue before Price Change, TR1 = P1 x Q1


    = 10 x 1000
    = £ 10,000
    Revenue after Price Change, TR2 = P2 x Q2
    = 14 x 951
    = £ 13,314
    Suggestion should be accepted as the revenues are increasing after price
    increase.
    Problem 2: A manufacturer of remote-controlled toy cars, Zoozoo Inc., trying to
    determine the price of its toy cars (all sell at the same price) during the upcoming
    Christmas season. In the past, the price of its toy cars has been Rs. 800, but the firm is
    getting worried because of the popularity of other types of toys. The firm has
    produced some new toy cars in an effort to increase its share in the toy market, but it
    is also considering a price decrease to Rs. 650. Zoozoo’s market research department
    has estimated the price elasticity of demand for the firm’s toy to be – 1.5. The
    estimated quantity that would be sold this Christmas season at a price of Rs. 800 is
    10,000.
    (i) How many toy cars would be sold at a price of Rs. 650 if Ep were -1.5?
    (ii)What would be the effect on the firm’s total revenues if the price were
    lowered to Rs. 650.

    Solution

    E = Q2 – Q1 X P2 + P1
    P2 – P1 Q2 + Q1

    -1.5 = Q2 – 10000 X 650+800


    650-800 Q2 + 10000
    -1.5 = Q2 – 10000 X 1450
    - 150 Q2 + 1000
    -1.5 = Q2 – 10000 X 29
    -3 Q2 + 1000

    4.5 (Q2 + 10000) = 29 (Q2 – 10000)


    45000 + 29000 = 24.5 Q2
    Q2 = 13673

    Revenue before Price Change, TR1 = P1 x Q1


    = 800 x 10000
    = Rs. 80,00,000
    Revenue after Price Change, TR2 = P2 x Q2
    = 650 x 13673 = Rs. 88,87,450

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