Economics Assignment: Analyzing Elasticity and Its Impact on Revenue

This assignment explores the concept of price elasticity of demand, examining how changes in price affect the quantity demanded and, consequently, total revenue. The solution analyzes specific scenarios, such as the impact of price changes on airline ticket sales, calculating elasticity coefficients to determine whether demand is elastic or inelastic. It explains the relationship between elasticity and revenue, demonstrating that when demand is inelastic, increasing prices can boost revenue, whereas elastic demand necessitates price reductions to increase revenue. The assignment also includes calculations of total revenue changes based on price adjustments and discusses the sensitivity of consumers to price fluctuations, providing insights into effective pricing strategies for businesses. This assignment is contributed by a student to be published on the website Desklib. Desklib is a platform which provides all the necessary AI based study tools for students.

1. The price elasticity of demand for tickets on the flight-
Change in price: from $200-$350
Change in demand: from 735-713
Ep = Price elasticity of demand
= Percentage change in quantity demanded /Percentage change in price
= (-22/735) / (150/200)
= -0.03
2. Rosie's Airline has a non-stop flight three times a day from San Diego to Phoenix.
At $50 per ticket, the airline sells 75 tickets. The new manager of Revenue
Management thinks he can increase total revenue by reducing the price of the
ticket by $5 to $45. At the price of $45, the airline sells 80 tickets.
Will reducing the price result in an increase in total revenue?
Answer 2
Ep = Price elasticity of demand
= Percentage change in quantity demanded /Percentage change in price
= (5/75) / (-5/50)
= -0.66
Elasticity is less than 1 which, means that demand is inelastic as the % change in Quantity
demanded is less than % change in price. So, reducing the price will not result in increase in TR
because when the demand is inelastic, the revenues can be increased by increasing the
product’s price. When the demand is inelastic, the consumers are not very much price sensitive.
3. Is the price elasticity of demand elastic or inelastic?
Elasticity is less than 1 which, means that demand is inelastic as the % change in Quantity
demanded is less than % change in price.
4. What will be the difference in total revenue if the price is reduced?
If the price is reduced, the total revenue will decline. Reducing the price will not result in increase
in TR because when the demand is inelastic, the revenues can be increased by increasing the
product’s price. When the demand is inelastic, the consumers are not very much price sensitive.
5. Explain what impact price elasticity of demand has on revenue.

Answer 5
The elasticity of price is the measure of the impact of the price change on the willingness of
consumer to buy some item. When there is increase in the price, there is fall in the quantity
demanded for that item. It basically tells that how much decline in the quantity demanded will
happen. When the demand is elastic, the consumers of that product become very sensitive to the
price changes. But when the demand is inelastic, the consumers are not very much price
sensitive. When the quantity sold of a god is multiplied by its price, the total revenue is obtained.
For increasing the profits of the company, the total revenue is increased. There are two ways to
increase the revenue: one is by increasing the price of the product, and other is by increasing the
number of units sold of the product.
There is a close relation between the price elasticity of demand and the total revenue of the
company because both the concepts deal with the same variables of the price and the quantity.
When the demand is elastic, the revenues are increased by reducing the product’s price and
when the demand is inelastic, the revenues can be increased by increasing the product’s price.