Economics Chapter on Total Revenue Prediction

Questions and Answers

What was the total revenue before the price increase?

$500/hour (correct)

$400/hour

$450/hour

$600/hour

If the price increases by 20%, what is the new price of the coffee?

$3.00 (correct)

$2.50

$3.50

$2.00

How many cups will be sold after the price increase?

200

160

170

140 (correct)

What is the effect on total revenue after the price increase and decrease in quantity sold?

420 Signup and view all the answers

If the old total revenue was $500/hour, what does a 30% drop in quantity indicate?

60 Signup and view all the answers

What is the percentage drop in quantity sold after the price increase?

30 Signup and view all the answers

How is total revenue calculated?

TR = P * Q Signup and view all the answers

What is the relationship between price increase and total revenue in this case?

Total revenue may increase or decrease Signup and view all the answers

What is the formula used to find the percentage change in quantity demanded (%ΔQD)?

|%ΔQD| = ED * |%ΔP| Signup and view all the answers

If the price of a small cup of coffee increases from $2.50 to $3.00, what is the percentage change in price (%ΔP)?

20 Signup and view all the answers

Given an elasticity of demand (ED) of 1.5 and a percentage change in price (%ΔP) of 20%, what is |%ΔQd|?

2 Signup and view all the answers

What impact does an increase in price have on quantity demanded, assuming elasticity is greater than 1?

30 Signup and view all the answers

How is total revenue (TR) defined based on price and quantity?

TR = Price * Quantity Signup and view all the answers

What will likely happen to total revenue if price increases and demand is elastic (ED > 1)?

Total revenue will decrease. Signup and view all the answers

At what point is elasticity considered unitary?

ED = 1 Signup and view all the answers

Which of the following statements is true about the effect of a price increase on quantity demanded when ED = 1.5?

Quantity demanded will decrease. Signup and view all the answers

What is the new total revenue (TR) if the new expected quantity demanded (QD) is 140 cups per hour and the price is $3?

$420/hour Signup and view all the answers

If the price increases, what can we expect to happen to the total revenue (TR)?

TR can be expected to fall. Signup and view all the answers

What is the area of the blue box representing the old total revenue (TR)?

$500 Signup and view all the answers

How can total revenue (TR) be visually represented in a graph?

As a rectangle whose area represents revenue. Signup and view all the answers

What happens to the area of the box representing new TR compared to the area of the box representing old TR?

The old TR area is larger than new TR area. Signup and view all the answers

What was the old price used to calculate the old total revenue?

$2.50 Signup and view all the answers

What is the appropriate formula to calculate the area of the rectangle representing total revenue (TR)?

Length * Width Signup and view all the answers

What does a decrease in total revenue (TR) imply about the relationship between price and quantity demanded?

An increase in price will lead to a decrease in quantity demanded. Signup and view all the answers

What does an elastic supply indicate about producers' response to price changes?

Producers will increase production significantly when prices rise. Signup and view all the answers

Which factor primarily contributes to inelastic supply?

Fixed production capacity Signup and view all the answers

How does the time horizon affect elasticity of supply?

Long run generally results in more elastic supply due to adjustment opportunities. Signup and view all the answers

If the elasticity of supply is measured at 0 < ES < 1, what does this signify?

Inelastic supply Signup and view all the answers

What effect does creating original content have on the elasticity of demand for Netflix?

It makes demand for Netflix less elastic. Signup and view all the answers

What is indicated by a supply elasticity greater than 1?

Supply is elastic, responding significantly to price changes. Signup and view all the answers

What characteristic of sellers can lead to inelastic supply?

Rigid production processes. Signup and view all the answers

What might be a consequence of an inaccurate assessment of supply elasticity in agriculture?

Ineffective pricing strategies that could harm farmers. Signup and view all the answers

What happens to total revenue when price increases and demand is elastic?

Total revenue decreases Signup and view all the answers

When price decreases, what is the expected outcome for total revenue if demand is inelastic?

Total revenue increases Signup and view all the answers

What effect does an increase in price have on total revenue if demand is inelastic?

Total revenue increases Signup and view all the answers

Which statement correctly describes price elasticity of supply?

It measures producers’ responsiveness to price changes Signup and view all the answers

Which category of demand results in total revenue rising when price is decreased?

Elastic demand Signup and view all the answers

If a product’s demand is unit elastic, what occurs when there is a price change?

Total revenue remains the same Signup and view all the answers

What action did the company take concerning its pricing strategy based on the demand information?

Increased the price of the higher tier plan Signup and view all the answers

If Netflix believes its market demand is inelastic, what might be a characteristic of its pricing strategy?

Maintaining or increasing prices to maximize revenue Signup and view all the answers

Study Notes

Predicting Changes in Total Revenue

Price of a small cup of coffee is 2.50;managementconsidersraisingitto2.50; management considers raising it to 2.50;managementconsidersraisingitto3.
Price elasticity of demand (ED) is estimated at 1.5.
Price increase of 50 cents leads to a 20% increase in price (%ΔP).
Change in quantity demanded (%ΔQD) can be calculated using ED and %ΔP: |%ΔQD| = ED * |%ΔP|.
For this scenario, %ΔQD = 1.5 * 0.20, resulting in a 30% decrease in quantity demanded (QD).

Changes in Total Revenue

Previous total revenue (TR) at 2.50with200cupssold/hour:TR=2.50 with 200 cups sold/hour: TR = 2.50with200cupssold/hour:TR=2.50 * 200 = $500/hour.
New expected QD after a 30% reduction is 140 cups/hour (200 - 60).
New total revenue after the price increase: TR = 3∗140=3 * 140 = 3∗140=420/hour.
Resulting in a decrease in total revenue from 500/hourto500/hour to 500/hourto420/hour when the price is raised.

Graphical Representation of Total Revenue

Total revenue can be visualized as the area of a box on a graph, with width representing quantity and height representing price.
Previous revenue box (old TR) area calculates to 500(500 (500(2.50 * 200 cups/hour).
New revenue box (new TR) area calculates to 420(420 (420(3 * 140 cups/hour).

Impact of Price Change on Total Revenue

If demand is elastic, increasing price decreases total revenue; if inelastic, increasing price increases total revenue.
A price increase will lead to increased TR if demand is inelastic and decreased TR if demand is elastic.
In this case, raising the price resulted in a fall in total revenue due to the elasticity of demand being greater than one.

Price Elasticity of Supply

Price elasticity of supply (ES) measures producer responsiveness to price changes.
Categories include:
- Inelastic supply (0 < ES < 1): Supply unresponsive to price changes.
- Unit elastic (ES = 1).
- Elastic supply (ES > 1): Supply responsive to price changes.

Factors Affecting Elasticity

Flexibility of sellers affects how quickly supply can adjust to price changes.
Time horizon influences elasticity; short-run supply is often more inelastic compared to long-run supply.

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Description

This quiz focuses on predicting changes in total revenue based on elasticity of demand and price changes. It covers the methods for calculating percentage changes in quantity demanded and their impact on revenue. Explore various scenarios and apply your understanding of economic principles.