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Intro. To Economics Assignment 01

Economics

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M Sharjeel M
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31 views2 pages

Intro. To Economics Assignment 01

Economics

Uploaded by

M Sharjeel M
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ECONOMICS (ECO401)

ASSIGNMENT 01
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

200 to Rs. 250. Coffee shop demand function is given below 𝑄𝑑 = 6000 − 20𝑃
Rs 200. The owner of the coffee shop is considering raising the price of a cup of coffee from Rs.

Requirements:
A. Calculate price elasticity of demand when price is Rs. 250.

Solution;
To calculate the price elasticity of demand when the price is Rs. 250, we use the following
formula; Elasticity = (% change in quantity demanded) / (% change in price)
Given demand function: Qd = 6000-20P
First calculate the initial quantity demanded at Rs. 200
Qd1 = 6000 – 20(200)
Qd1 = 6000- 4000
Qd1 = 2000 cups
Now calculate the new quantity demanded after the price increased to Rs. 250
Qd2 = 6000 – 20(250)
Qd2 = 6000- 5000
Qd2 = 1000 cups
Now we can calculate the % change in quantity demanded = ((Qd2 – Qd1) / Qd1) x 100
% change in quantity demanded = ((1000 – 2000) / 2000) x 100
% change in quantity demanded = (-1000 / 2000) x 100
% change in quantity demanded = -50%
Now calculate change in rpice
% change in price = ((new price – old price ) / old price) x 100
% change in price = (250 – 200 / 200) x 100
% change in price = (50 / 200) x 100
% change in price = 25%
Now we calculate the price elasticity of demand;
Elasticity = (% change in quantity demanded) / (% change in price)
Elasticity = (-50% / 25%)
Elasticity = -2
Therefore, the price, elasticity of demand when the price is Rs. 250 is -2.

B. Calculate total revenue both before and after price rise.


Before the price rise:
Total revenue (TR1) = Price (P1) x quantity demanded (Qd1)
TR1 = Rs. 200 x 2000 cups
TR1 = Rs. 400,000
After the price rise,
Total revenue (TR2) = Price (P2) x Quantity demanded (Qd2)
TR2 = Rs. 250 x 1000 cups
TR2 = Rs. 250,000 Answer

C. Also explain what will be the effect of price increase on total revenue by keeping in view
the results of part B?
The effect of the price increase on total revenue can be analyzed by comparing TR1 & TR2.
In this case, we see that the after the price increase, the total revenue is decreases from Rs.
400,000 to Rs. 250, 000. This implies that the price increase resulted in a decrease in total
revenue.
Based on the results of part B, we can conclude that the price increase had negative effect
on total revenue.

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