This is a three part question A A few months ago DirecTV inc

Solution

A.

Amount change in quantity demanded of a good or service, when its price changes, totally depend on price elasticity of that good or service.

Price elasticity is basically, responsiveness of demand, when price changes.
Price elasticity is calculated as:

%change in quantity demanded ÷ % change in price

Mainly, there are two type of demand: elastic demand and inelastic demand.
Elastic demand is the one when the response of demand is greater with a small proportionate change in the price. On the other hand, inelastic demand is the one when there is relatively a less change in the demand with a greater change in the price.
Hence we can say, when price elasticity is more than 1, demand is elastic and when it is less than 1, demand is said to be inelastic.

In above, situation price changes $55 to $65 i.e. 18.18%

We suppose, that demand for directv is inelastic, and quantity changed from 400 to 380 i.e. 5%.

Here we can calculate, that previously firm was generating revenue of $22000 (400×55)

And now it is $24700 (380×65).

Hence we can see, though demand decreased due to increase in price, but revenue increases, because price elasticity is low. and the responsiveness of quantity demanded to increase in price is low, so consumers don\'t have much of an option but to not let the total quantity demanded to fall by too much and revenue increases.

B. Price elasticity = % change in quantity demanded ÷ % chnage in price.
% change in price = - 5/20 = -25%
% change in demand = 20/40 = 50%
Price elasticity = 50% ÷ -25% = 2

C. Price elasticity = 2, indicates that responsiveness of quantity demanded is more, than the price changes.

It means if price changes by 1%, change in demand will be 2%.

and demand is very elastic.