17. The current price for a good is $20, and 100 units are demanded at that price. The price elasticity of demand for the good is -1. When the price of the good drops by 10% to $18, consumer surplus:
Increases or decreases by $__?
If the market price of bikes rises from $50 to $60, then the company will want to produce a larger quantity of bikes. This is because the overall marginal revenue is now higher and will be maximized differently. Before profit was maximized at six bikes, now the profit will be maximized by producing more bikes, perhaps seven.
Demand for bikes has suddenly increased, and the market price has risen from $50 to $60.
In three to five sentences, explain how this change will affect profits.
Demand for bikes has suddenly increased, and the market price has risen from $50 to $60.
In three to five sentences, explain how this change will affect profits.
the profit will decrease after a certain price at a higher rate. this means more bikes will need to be produced?
To determine how consumer surplus changes when the price of a good drops, we need to calculate the change in quantity demanded.
We know that the price elasticity of demand (PED) is calculated using the formula:
PED = (% change in quantity demanded) / (% change in price)
In this case, we are given that the price elasticity of demand is -1. Since the price dropped by 10%, we can substitute the values into the formula:
-1 = (% change in quantity demanded) / (-10%)
Rearranging the equation, we get:
% change in quantity demanded = -1 * (-10%) = 10%
Since the percentage change in quantity demanded is positive 10%, we can calculate the actual change in quantity demanded as follows:
Change in quantity demanded = % change in quantity demanded * Initial quantity demanded
Change in quantity demanded = 10% * 100 units = 10 units
Now we can calculate the change in consumer surplus based on the change in quantity demanded.
Consumer surplus is the difference between what consumers are willing to pay (which is determined by the initial price) and what they actually pay (which is determined by the new price).
Initially, consumers were willing to pay $20 per unit. With the price now dropping to $18, the consumers pay $18 per unit. To calculate the change in consumer surplus, we subtract the new total expenditure from the initial total expenditure.
Change in consumer surplus = (Initial price - New price) * Change in quantity demanded
Change in consumer surplus = ($20 - $18) * 10 units
Change in consumer surplus = $2 * 10 units
Change in consumer surplus = $20
Therefore, consumer surplus decreases by $20 when the price of the good drops by 10%.