ECONOMICS (ECO401) Student ID: bc230202216

ASSIGNMENT SOLUTION:

Requirements:

A. Calculate price elasticity of demand when price is Rs. 250.

B. Calculate total revenue both before and after price rise.

C. Also explain what will be the effect of price increase on total revenue by keeping in
view the results of part B?

Solution:

A. Calculate price elasticity of demand when price is Rs. 250.

Elasticity of demand = % change in quantity demand / % change in price

Demand function of the coffee shop is Qd = 6000-20P

At the price of Rs.200 the quantity demand is

Q1= 6000-20(200) = 2000

At the price of 250 the quantity demand is

Q2= 6000-20(250) = 1000

The % change in quantity demand is:

(% change in quantity demand) = (Q2-Q1) / Q1 x 100

1000-2000 / 2000 x 100 = 50%

The % change in price is:

(%change in price) = (New price – Old price) / old price x 100

(250-200) / 200 x 100 = 25%

Using the formula for price elasticity of demand:

Elasticity of demand = (%change in quantity demand) / (%Change in price)

(-50% / 25%) = -2%

Price elasticity of demand is -2%

B. Calculate total revenue both before and after price rise.

Total revenue 1 = 2000 x 200 = 400,000

Total revenue 2 = 1000 x 250 = 250,000

C. Also explain what will be the effect of price increase on total revenue by
keeping in view the results of part B?

The price increase from 200 to Rs 250 has resulted in a decrease in the quantity
demanded from 2000 cups of coffee to 1000 cups of coffee per day. Revenue have also
decreased from 40000 to 250000, this is because the decrease in quantity demanded is
greater than the increase in price. If the goal was to increase the revenue then the
coffee shop should have reduced the price or kept it at the same price.