The following graph shows two known points (X and Y) on a demand curve for tomatoes. 10 8 7 PRICE (Dollars per pound) A Y wo X N Demand 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of pounds of tomatoes) According to the midpoints formula, the price elasticity of demand for tomatoes between point X and point Y is approximately , which suggests that the demand for tomatoes is between points X and Y.The following graph displays four demand curves (LL, MM, NN, and 00) that intersect at point A. CD 200 130 N 160 M0 M \\ E' D E g \\ + + '- 120 3 0+ I E A g 100 |_ ++ |_ o B 9 NJ 50 9 n: D- 50 M no N 20 O o 20 40 so 30100120140160180 zoo QUANTITY (Units) Using the graph, complete the table that follows by indicating whether each statement is true or false. (Hint: You can display the coordinates by clicking on the pains.) Statement True False Between points A and D, curve MN is elastic. Curve NN is more elastic between points A and D than curve MM is between points A and C. Between points A and E, curve 00 is perfectly inelastic. 4. The total revenue test of price elasticity of demand Imagine that you run the toll authority for a city bridge. You must charge all of your customers the exact same toll. Initially, you have set the price at $1 per trip. The blue line on the following graph shows the weekly demand curve for trips across the city bridge. On the following graph, use the purple rectangle (diamond symbols) to shade the area representing the total weekly revenue when the toll is $1 on the graph. Notice that when you click on the rectangle, the area is displayed. ?) TR at $1 TR at $2 TOLL (Dollars per vehicle) Demand w N 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of vehicles per week) An advisor has suggested that if you raise the toll to $2, the toll authority would bring in more revenue. To analyze this, use the green rectangle (triangle symbols) to shade the area representing the total weekly revenue when the toll is $2 on the graph. When the toll is $1, total revenue is $ thousand per week, but when the toll is $2, total revenue is $ thousand per week. Based on your analysis, you can conclude that your advisor is in suggesting that total revenue would rise if you increase the toll from $1 to $2, because the demand for trips across the bridge for prices between $1 and $2 is5. The variation in elasticity and total revenue along a demand curve The following graph shows the daily demand curve for bippitybops in Detroit. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. (?) 200 180 Total Revenue 160 140 LA 120 100 8 PRICE (Dollars per bippitybop) 8 8 Demand o 16 24 32 40 48 56 64 72 80 8 QUANTITY (Bippitybops per day)Calculate the daily total revenue when the market price is $180, $160, $140, $120, $100, $80, $60, and $40 per bippitybop. Then, use the green point (triangle symbol) to plot the daily total revenue against quantity corresponding to these market prices on the following graph. (?) 3840 3520 3200 Total Revenue 2880 2560 2240 1920 1600 TOTAL REVENUE (Dollars) 1280 960 640 320 o 0 8 16 24 32 40 48 56 64 72 80 QUANTITY (Bippitybops per day) According to the midpoints formula, the price elasticity of demand between points A and B on the initial graph is approximately Suppose the price of bippitybops is currently $120 per bippitybop, shown as point A on the initial graph. Because the price elasticity of demand between points A and B is , a $20-per-bippitybop decrease in price will lead to in total revenue per day. In general, in order for a price increase to cause a decrease in total revenue, demand must be6. Determinants of price elasticity of demand Consider some determinants of the price elasticity of demand: o The availability of substitutes - The market used to measure demand . The share of budget spent on the product a The time horizon being considered A good without any close substitutes is likely to have relatively ' demand, because consumers cannot easily switch to a substitute good if the price of the good rises. The price elasticity of demand for a good also depends on how broadly the good is dened. Organize the goods found in the following table by indicating which is likely to have the mast elastic demand, which is likely to have the least elastic demand, and which will have a demand elasticity that Falls in between. Categories Most Elastic In Between Least Elastic Red bell peppers Vegetables Food Price elasticity for a good also depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand? Lightbulbs Toothbrush TV and Internet service plan The price elasticity of demand is also affected by the given time horizon. Compared to the short-run demand for oil, the demand for oil in the long run will tend to be ' elastic. Graph Input Tool (? Market for Triple Sevens's Hotel Rooms Price 200 (Dollars per room) Quantity 300 Demanded (Hote PRICE (Dollars per room) rooms per ! Demand night) Demand Factors 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hotel rooms Average 40 Income Thousands of dollars) Airfare from 200 SFO to LAS (Dollars per round trip) Room Rate 200 at Exhilaration (Dollars per night) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Triple Sevens is charging $200 per room per night. If average household income increases from $40,000 to $60,000 per year, the quantity of rooms demanded at the Triple Sevens ~ from rooms per night to rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Triple Sevens are If the price of a room at the Exhilaration were to decrease from $200 to $160, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens from rooms per night to rooms per night. Because the cross-elasticity of demand is , hotel rooms at the Triple Sevens and hotel rooms at the Exhilaration are . (Hint: Remember to reset any values you changed in the graph to their initial values by clicking on the circular arrow that appears next to the selected white field.) Triple Sevens is debating decreasing the price of its rooms to $175 per night. Under the initial demand conditions, you can see that this would cause its total revenue to Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the portion of its demand curve. (Hint: Remember to reset any values you changed in the graph to their initial values by clicking on the circular arrow that appears next to the selected white field.)