Until recently Bills Bayside Rentals rented a beach cruiser

Until recently, Bill’s Bayside Rentals rented a beach cruiser for $12 per hour and would rent 75 beach cruisers per week. They just dropped the price to $8 and as a result, they now rent 125 beach cruisers per week. Using the midpoint rule, find the price elasticity of demand for Bill’s beach cruisers. Is the demand for the beach cruisers elastic or inelastic? Did their total revenue increase or decrease with the change in price?

Solution

Ans

Elassticilty=proportionate change in quantity /proportionate change in price

= (q1+12/q2-q1/2) /p1+p2/p2-p2/2

= 125+75/50/2 whole divided by 20/12-8/2

= 8/10=.8

Since it is less than 1 demand is inelastic. Since demand is inelastic price decrease will reduce revenue as sales rise proportionately less than fall in price