A newspaper recently lowered its price from $0.50 to $0.30. As it did, the numbe

Question

A newspaper recently lowered its price from $0.50 to $0.30. As it did, the number of newspapers it sold increased from 240,000 to 280,000

a) What was the price elasticity of demand for this newspaper (Arc/ mid-point formula)?

b) What was the degree of elasticity for the newspaper?

c) A 1% change in the price of the newspaper led to a change in quantity demanded of______?

d) What happened to the newspaper’s total revenue as it dropped its price?

4.Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 unitswere sold.Without calculating the price elasticity value, can you determine whether it is elastic, unit-elastic, or inelastic? Show your work and explain your answer.

Explanation / Answer

(a)

Cross price elasticity of demand = [Change in quantity / average quantity] / [Change in price / average price]

= [(280,000 - 240,000) / (240,000 + 280,000) / 2] / [$(0.3 - 0.5) / $(0.3 + 0.5) / 2]

= 0.15 / - 0.50 = - 0.3

(b)

Since absolute value of elasticity < 1, degree of elasticity: Inelastic.

(c)

As price changes by 1%, quantity demanded changes by 0.3% in the opposite direction.

(d)

Since demand is inelastic, a price reduction will decrease total revenue.

(4)

Price has decreased by $(55 - 33)/$55 = 40%, but quantity has increased by 53%.

Increase in quantity > decrease in price.

So, demand is elastic.

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