Question

Question #1: Barney owns a bagel business in New York City and he wants to increase his total revenue. He knows that when bagels are $1, he sells 250 an hour, and when he lowers the price to $0.75, he sells 275 an hour. a. Calculate the price elasticity of demand for Barney’s bagels. b. Using the price elasticity of demand for Barney’s bagels, explain whether he should raise or lower the price to generate more revenue. c. A bakery moves in across the street from Barney’s shop. Explain what is likely to happen to the price elasticity of demand for Barney’s bagels. Question #2: Explain why you agree or disagree with the following statement: "Higher prices always yield higher revenues."

Answer 1

Answer:

a. Calculate the price elasticity of demand for Barney’s bagels.

0.4 price inelastic

b. Using the price elasticity of demand for Barney’s bagels, explain whether he should raise or lower the price to generate more revenue.

Barney should increase his prices in order to increase total revenue.

c. A bakery moves in across the street from Barney’s shop. Explain what is likely to happen to the price elasticity of demand for Barney’s bagels.

If a bakery moves in front of Barney's bagel place, then the PED of his product is probably going to increase. The higher the competition, the higher the PED. This means that any change in price will result in a higher proportional change in quantity demanded.

2) I do not agree with that statement. If the PED is price inelastic, then increasing the product's price will increase total revenue, but if the PED is price elastic, any small increase in price will result in a larger decrease in quantity demanded. If the PED is price inelastic, then any change in price will not alter total revenue.

Explanation:

The price elasticity of demand shows us how a 1% change in price will affect the quantity demanded of a product.

PED = % change in Q demanded / % change in price

% change in Q demanded = (275 - 250) / 250 = 10%

% change in price = (0.75 - 1) / 1 = -25%

PED = 0.1 / -0.25 = -0.4 or |0.4| in absolute terms

The PED for Barney's bagels is demand inelastic (PED < 1), therefore, a 1% change in price will result in a smaller proportional change in quantity demanded.

If Barney increases his price to $1.50 instead of lowering it, the quantity demanded will decrease only by:

% change in Q demanded = 0.5 change in price x 0.4 = 0.2 or 20% decrease

his total revenue will increase from $250 per hour to 200 x $1.50 = $300 per hour.

Answer 2

Q1. The price elasticity for the company would be 0.4.

Q2. No, it is not true that a higher price would bring higher revenues from their sales.

Question 1:

a. The price elasticity is derived from the given formula:

$\frac{percentagechange in Qd}{percentage change in P}$

Hence, the percentage change in quantity demanded would be:

$\frac{275 - 250}{250} \\=0.1$

Now, the percentage change in price would be:

$\frac{0.75 - 1}{1} \\=-25$

Finally, price elasticity would be:

$\frac{0.1}{-25} \\=-0.4$

b. Therefore, the business may increase its product's price to get increased revenue as the demand elasticity is 0.4, which means less change in quantity demanded would be seen when prices tend to rise by 1%

c. If the business plan to move across the price elasticity would be seen as rising because of experiencing more competition in the market. Thus, when prices increase by even 1% then the quantity demanded may be seen as changing at a higher rate.

Question 2:

The business revenue is dependent on the price and sales of the product. Further, the elasticity of demand is sales essential for deciding the quantity of demand by the customers. Thus, when demand is highly elastic then increasing the product price would harm the final revenue of the business.

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