Assignment 6

Dalia Mohamed sayed

Group 1

Q1: Explain with graph the relationship between price elasticity of demand and revenue?

1- When demand is price-inelastic, a price decrease reduces total revenue.

2- When demand is price-elastic, a price decrease increases total revenue.
3- in the case of unit-elastic demand, a price decrease leads to no change in total revenue.
Total revenue is the product of price times quantity, P*Q. further, the area of a rectangle is
always equal to the product of its base times its height. Therefore, total revenue at any point on a
demand curve can be found by examining the area of the rectangle determined by the P and Q at
that point
• The relationship between elasticity and revenue for the unit-elastic case in Figure 4-2(b). Note
that the shaded revenue region (P*Q) is $1000 million for both point A and B. The shaded areas
representing total revenue are the same because of offsetting changes in the Q base and the P
height.
• that Figure 4-2(a) corresponds to elastic demand. In this figure, the revenue rectangle expands
from $1000 million to $1500 million when price is halved. Since total revenue goes up when price
is cut, demand is elastic.
• In Figure 4-2(c ) the revenue rectangle falls from $40 million to $30 million when price is
halved, so demand is inelastic.
Q2: define the price elasticity of supply?

• The Price Elasticity of Supply is the percentage change in quantity supplied divided by the
percentage change in price.
• The exact definition of the Price Elasticity of Supply , is as follows:
ES = Percentage change in quantitySupplied
Percentage change inPrice

Q3: Who pays the Tax? (Use the Gasoline example)

• The demand curve does not shift because the quantity demanded at each retail price is
unchanged by the gasoline-tax increase. Note that the demand curve for gasoline is relatively
inelastic.
• the oil industry pays a small fraction, for it receives only $1.80 rather than $2. But the
consumer bears most of the burden, with the retail price rising $1.80, because supply is relatively
price-elastic whereas demand is relatively price-inelastic