In Cleveland, Clive sells 15 cloves at a price of $5 each. If Clive lowers his p

Question

In Cleveland, Clive sells 15 cloves at a price of $5 each. If Clive lowers his price by 10%, to $4.50 per clove, he will sell 16, or 6.66% more. In Dallas, Della sells 15 cloves for $5 each. If Della lowers her price by 2%, to $4.90, she will sell 16 cloves, or 6.66% more. a. Classify the demand curves that Clive and Della face as elastic or inelastic. Determine the marginal revenue of the 16th unit for Clive. Then, compute the marginal revenue of the 16th unit for Della. How does the marginal revenue received by a seller depend on the price elasticity of demand? Explain your answer.

Explanation / Answer

ans a)

clive's elasticity= % change in deamand/% change in price = - (6.66)/-10 = 0.66

della's elasticity = - (6.66)/-2 = 3.33

so clive's demand is inelastic because elasticity is less than 1 and Della's elasticity is elastic as elasticity is greater than 1

ans b)

MR of 16th unit of Clive= TR when q=16 - TR when q=15

                                     = 16*4.5     -   15*5

                                     =72 - 75   = -3

MR of 16th unit of Della = TR when q=16 - TR when q=15

                                       =16*4.9   -    15*5

                                       = 78.4 - 75   = 3.4

ans c) when demand is inelastic or e<1, MR will be negative whereas when demand is ellastic or e>1 , MR will be positive

MR= AR (1-(1/e))

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