Question

Jimmy's Peanut Farm wants to increase the quantity of peanuts that it sells by 1 percent. The price elasticity of demand for peanuts sold by Jimmy's Peanut Farm is 0.4. What is the percentage price cut that will achieve the​ firm's objective? The percentage price cut is _ nothing percent.

Answer 1

Answer: Jimmy's Peanut Farm has to decrease its prices by 2.5% in order to achieve a 1% increase in the quantity of peanuts it sells.

Jimmy's Peanut Farm can increase the quantity sold by 1% only when the demand for peanuts increases. Demand for peanuts will increase only when the price of peanuts decrease. The Price Elasticity of Demand measures the responsiveness of demand to a percentage change in price.

The formula for Price Elasticity of Demand (PED) is given by the formula:

$\mathbf{PED = \frac{percentage change in quantity}{percentage change in price}}$

We have:

Percentage increase in quantity               1%  or 0.01

Price Elasticity of Demand (PED)               0.40

Re-arranging the PED formula above we get,

$\mathbf{percentage change in price}= \frac{percentage change in quantity}{PED} *100}$

Substituting the values in the equation above we get,

${percentage change in price} = \frac{0.01}{0.4}*100 =2.5$