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The Case:
Suppose XYZ is a coffee shop and located in one of the busy crowded university of Pakistan. This coffee shop is a popular spot for people to sit and discuss their studies and it is also famous for a quick cup of coffee on their way to class. The shop is open from 9:00 AM to 6:00 PM, Monday through Friday. The shop is currently selling 2,000 cups of coffee per day for Rs 200. The owner of the coffee shop is considering raising the price of a cup of coffee from Rs. 200 to Rs. 250. Coffee shop demand function is given below 𝑄𝑑 = 6000 − 20𝑃 Requirements:
A. Calculate price elasticity of demand when price is Rs. 250.
B. Calculate total revenue both before and after price rise.
C. Also explain what will be the effect of price increase on total revenue by keeping in view the results of part B?
Solution:
A. Answer
To calculate the price elasticity of demand when the price is Rs. 250, we can use the following formula:
Elasticity (ε) = (% Change in Quantity Demanded) / (% Change in Price)
First, let’s calculate the initial quantity demanded at the current price of Rs. 200:
Qd1 = 6000 – 20P
Qd1 = 6000 – 20(200)
Qd1 = 6000 – 4000
Qd1 = 2000
Next, let’s calculate the new quantity demanded at the proposed price of Rs. 250:
Qd2 = 6000 – 20P Qd2 = 6000 – 20(250) Qd2 = 6000 – 5000 Qd2 = 1000
Now, we can calculate the percentage change in quantity demanded:
% Change in Quantity Demanded = [(Qd2 – Qd1) / Qd1] * 100 %
Change in Quantity Demanded = [(1000 – 2000) / 2000] * 100 %
Change in Quantity Demanded = (-1000 / 2000) * 100 %
Change in Quantity Demanded = -50%
Next, let’s calculate the percentage change in price:
% Change in Price = [(New Price – Old) / Old Price Price] * 100 % Change in Price = [(250 – 200) / 200] * 100 % Change in Price = (50 / 200) * 100 % Change in Price = 25%
Now we can calculate the price elasticity of demand:
Elasticity (ε) = (% Change in Quantity Demanded) / (% Change in Price)
Elasticity (ε) = (-50% / 25%)
Elasticity (ε) = -2
Therefore, the price elasticity of demand when the price is Rs. 250 is -2.
B. Answer
To calculate the total revenue before and after the price rise, we use the formula:
Total Revenue = Price x Quantity
Before the price rise: Price = Rs. 200
Quantity = 2000
Total Revenue1 = Price x Quantity
Total Revenue1 = Rs. 200 x 2000
Total Revenue1 = Rs. 400,000
After the price rise: Price = Rs. 250
Quantity = 1000
Total Revenue2 = Price x Quantity
Total Revenue2 = Rs. 250 x 1000
Total Revenue2 = Rs. 250,000
C. Answer
The effect of price increase on total revenue can be determined by comparing the total revenue before and after the price rise.
In this case: Total Revenue1 = Rs. 400,000 (before the price rise)
Total Revenue2 = Rs. 250,000 (after the price rise)
We can see that after the price increase, the total revenue decreased from Rs. 400,000 to Rs. 250,000. This suggests that the price increase led to a decrease in total revenue.
The price elasticity of demand value of -2 indicates that the demand for coffee is relatively elastic. When the price was increased, the quantity demanded decreased significantly by 50%, resulting in a decrease in total revenue.
Overall, the price increase negatively impacted the coffee shop’s total revenue.
ECO401 Assignment 1 Solution 2023
ECO401 Assignment 1 Solution
ECO401 Assignment 1
ECO401 Assignment
ECO401 Assignment No 1 Solution 2023
