University of the People

ECON 1580-01

Introduction to Economics

AY2024-T5

Written Assignment Unit 2

Demand and Supply

Date: 6 July 2024

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1. Compute the price elasticity of demand between these two points.
Original price per meal: $20
Original quantity demanded per day: 400 meals

New price per meal: $18

New quantity demanded per day: 450 meals

Thus, the PED is computed to be -1.11765.

2. Would you expect total revenues to rise or fall? Explain.

Total revenues would rise. Since the price elasticity is greater than 1, a reduction in price
leads to a more than proportional increase in quantity demanded. Total revenue is computed
as Price x Quantity. Even though the price is lower, the large increase in quantity leads to
higher total revenue.

3. Suppose you have reduced the average price of a meal to $18 and are considering a
further reduction to $16. Another survey shows that the quantity demanded of
meals will increase from 450 to 500 per day. Compute the price elasticity of demand
between these two points.

4. Would you expect total revenue to rise or fall as a result of this second price reduction?
Explain.

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 I do not expect total revenue to rise or fall necessarily. Although quantity demanded
increases with each price drop, the price elasticity of demand is equal to 1 in both cases,
indicating unit elastic demand. Since unit elastic demand means a 1% reduction in price
results in a 1% increase in quantity demanded, the effects on price and quantity would
balance out, leaving total revenue unchanged.

5. Compute total revenue at the three meal prices. Do these totals confirm your
answers in (b) and (d) above?

Original situation:
Price: $20
Quantity: 400
Revenue: $20 * 400 = $8,000

First reduction:
Price: $18
Quantity: 450
Revenue: $18 * 450 = $8,100

Second reduction:
Price: $16
Quantity: 500
Revenue: $16 * 500 = $8,000

The total revenue calculations confirm that revenue rose with the first price reduction but was
unchanged with the second, consistent with the elasticity calculations and expectations stated in
(b) and (d).

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