Assignmentno.

Fall 2023

Subject: Eco401
Question: 1

The Case: Suppose XYZ is a coffee shop and located in one of the busy crowded university of
Pakistan. This coffee shop is a popular spot for people to sit and discuss their studies and it is
also famous for a quick cup of coffee on their way to class. The shop is open from 9:00 AM to
6:00 PM, Monday through Friday. The shop is currently selling 2,000 cups of coffee per day
for Rs 200. The owner of the coffee shop is considering raising the price of a cup of coffee
from Rs. 200 to Rs. 250. Coffee shop demand function is given below 𝑄𝑑 = 6000 − 20𝑃

Requirements:

A. Calculate price elasticity of demand when price is Rs. 250.

B. Calculate total revenue both before and after price rise.

C. Also explain what will be the effect of price increase on total revenue by keeping in view
the results of part B?

Answer:

A. Calculate price elasticity of demand when price is Rs. 250.

To calculate the price elasticity of demand when the price is Rs.250. we can use the following
formula:

Formula:

Elasticity=(% Change in quantity demamded)/(% Change in price)

Give the demand function : Qd=6000-20p

Let’s first calculate the initial quantity demanded at the current price of Rs.200:

Qd1 =6000-20(200)

Qd1=6000-4000

Qd1= 2000

Now lets calculate the new quantity demand after the price increase to Rs. 250
Qd2= 6000-20(250)

Qd2= 6000-5000

Qd2=1000cups

Next we can calculate the percentage change in quantity demand:

%Change in quantity Demand=((Qd2-Qd1)/Qd1)*100

%Change in quantity demand = ((1000-2000)/2000)*100

%Change in quantity demand =(-1000/2000)*100

%Change in quantity demand -50%

Now lets calculate the percentage change in price:

% Change in price=((New price-Old price)/Old price *100

%Change in price= ((250-200)/200)*100

%Change in price=(50/200)*100

%Change in price=25%

Now we can calculate the price elasticity of demand :

Elasticity =(%Change in quantity demand )/(% Change in price)

Elasticity=(-50%/25%)

Elasticity=-2

Therfore, the price elasticity of demand when the price is 250 is -2

B. Calculate total revenue both before and after price rise.

Before the price rise:

Total Revenue(TR1)= Price(p1)*Quantity demand (Qd1)

TR1=Rs. 200*2000cups

TR1= Rs. 400,000cups

After the price rise:

Total revenue (TR2)=Price(p2)*quantity Demanded (Qd2)

TR2=Rs. 250*1000cups

TR2=Rs.250,000 cups

C. Also explain what will be the effect of price increase on total revenue by keeping in view
the results of part B?

In this case we see that after the price increase the total revenue decrease fromRs. 400,000to
Rs. 250,000. This implie that the price increase resulted decrease in tpotal revenue .

Based on the result part B we can conclude that the price increase has the negative affect on
total revenue. This suggested that the demand for coffe in this particular market is elastic,
mening that a change in price has a relative large impact on the quantity demand.The decrease
in quantity demand resulting from the price increase outweight the higher price the cups ,
leading to a decrease in total revenue.