John owns a food stall in New York City which sells hamburgers. Unfortunately, his business is not doing well, and there is a high risk that the company will go bankrupt in the near future. In an attempt to increase the revenue of his company, John decides to experiment with changing the price of his hamburgers and he keeps a record of the results.
Table 1 shows the daily sales of hamburgers at each corresponding price.
| Price of a hamburger ($) | Sales of hamburgers / day |
| 6 | 100 |
| 7 | 80 |
Question 1
Based on the data in table 1, calculate the price elasticity of demand (PED) for hamburgers.
To calculate PED using the information in the table students should use the following formula.
PED = % = Change in Quantity Demanded / % Change in Price
Thus:
% Change in Quantity Demanded = ((80 – 100) / 100) * 100 = -20%
% Change in Price = ((7 – 6) / 6) * 100 = 16.67%
PED (Hamburgers) = -20% / 16.67% = -0.2 / 0.1667 = -1.20
However, it is common practice to write PED as a positive number.
| PED | (Hamburgers) = |-1.20| = 1.20
The PED for hamburgers at John’s food stall is 1.20.
Question 2
Based on the data in table 1, calculate the daily total revenue from hamburgers at each price.
| Price of a hamburger ($) | Sales of hamburgers / day | Total revenue ($) / day |
| 6 | 100 | |
| 7 | 80 |
To calculate the daily total revenue from hamburgers students should use the following formula.
Total Revenue = Price * Quantity
John’s Total Revenue ($6) = 6 * 100 = $600
John’s Total Revenue ($7) = 7 * 80 = $560
| Price of a hamburger ($) | Sales of hamburgers / day | Total revenue ($) / day |
| 6 | 100 | 600 |
| 7 | 80 | 560 |
Question 3
Assuming the PED remains constant, what would be the daily total revenue if John increased the price to $8 per hamburger?
To work out this problem, students must perform the following calculations.
% Change in Price = ((8 – 7) / 7) * 100 = 14.29%
% Change in Quantity Demand = (14.29% * -1.20) * 100 = -17.15%
Change in Quantity of Hamburgers Demanded = 80 * -17.15 = 13.72 ≈ 14
It is not possible to sell 72% of a hamburger. Therefore, we round up to the nearest whole number.
Quantity of Hamburgers Demanded = 80 – 14 = 66
John’s Total Revenue ($8) = 8 * 66 = $528
Question 4
Calculate the increase/decrease in daily total revenue from increasing the price to $8 per hamburger.
Change in John’s Total Revenue = 528 – 560 = -$32
An increase in the price of hamburgers from $7 to $8 results in a $32 decrease in daily total revenue.
Question 5
Table 2 is an incomplete list of the value of PED with the corresponding classification for each case. Using the example given in row A, complete the rest of the table.
| Value of PED | Classification | |
| A | 1 > PED > 0 | Price Inelastic Demand |
| B | Price Elastic Demand | |
| C | Unit Elastic Demand | |
| D | Perfectly Inelastic Demand | |
| E | Perfectly Elastic Demand |
| Value of PED | Classification | |
| A | 1 > PED > 0 | Price Inelastic Demand |
| B | ∞ > PED > 1 | Price Elastic Demand |
| C | PED = 1 | Unit Elastic Demand |
| D | PED = 0 | Perfectly Inelastic Demand |
| E | PED = ∞ | Perfectly Elastic Demand |
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