Nataraj (2007) finds that a 100100 % increase in the price of water for heavy users in Santa Cruz caused the quantity of water they demanded to fall by an average of 2020 %. (Before the increase, heavy users initially paid $1.551.55 per unit, but afterwards they paid $3.103.10 per unit.) In percentage terms, how much did their water expenditure (price times quantity) long dash-which is the water company's revenuelong dash- change?

Question

Micah Espinoza

Business

24 June, 06:52

Nataraj (2007) finds that a 100100 % increase in the price of water for heavy users in Santa Cruz caused the quantity of water they demanded to fall by an average of 2020 %. (Before the increase, heavy users initially paid $1.551.55 per unit, but afterwards they paid $3.103.10 per unit.) In percentage terms, how much did their water expenditure (price times quantity) long dash-which is the water company's revenuelong dash- change?

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Craig Velez · Answer 1

In percentage terms It wil lbe an increase of 60%

Explanation:

We will calculate as follow:

currently the revenue is 1.55

if the price goes up to 3.10 the demand falls by 20%

so we are reducing sales revenue by 20%

3.10 x (1 - 20%) = 3.10 x 0.8 = 2.48

Now we can calculate the percent of change in the water expenditure:

2.48/1.55 - 1 = 0.60

In percentage terms It wil lbe an increase of 60%