Q1) "If price of a red widget increases and quantity demanded decreases, then demand should be elastic." True or false, and why?
1. Suppose that for each 10% rise in price of gasoline, sales level for gasoline drops by 2%. compute the price elasticity of demand for gasoline. Use general formula for elasticity, not midpoint or arc elasticity formula. Illustrate your arithmetic and label your result as elastic or inelastic.
2. Suppose price of a first class stamp rises by 10% and sales level falls by 10%. Determine numerical elasticity value? Is result elastic, inelastic, or unit elastic? Would revenue from sale of stamps rise, fall, or remain the same?
3. Now suppose that demand for first class stamps is elastic. What would occur to US Postal Service's total revenue if it raised price of stamps by 10%? By 20%? Would revenue rise, fall, or stay same, and why? Would numerical elasticity value be greater than 1 or less than 1?
4. "If business firm believes that demand is inelastic at current price, then firm can increase its profit by raising price of its product and selling less." True or false, and why? Address both revenue and costs. Note that total revenue and profit are different. Total revenue is price times quantity (i.e., total sales), where as profit equals total revenue minus total costs.