Question

Danny “Dimes” Donahue is a neighborhood’s 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $2.5 each, he sells 250. At a price of $2 each, he sells 300. Instructions: Round your answer to 1 decimal place.
a. What is the elasticity of demand? .
b. Is demand elastic or inelastic over this price range? .
c. If demand had the same elasticity for a price decline from $2 to $1.5 as it does for the decline from $2.5 to $2, would cutting the price from $2 to $1.5 increase or decrease Danny’s total revenue? .

Answer 1

Answer:

A) Price elasticity of demand (PED) = 1

B) the PED is unitary

C) Danny's total revenue will decrease to $562.50

Explanation:

A) the formula for calculating price elasticity of demand is:

PED = % change in quantity demanded / % change in price

• % change in quantity demanded = (300 - 250) / 250 = 50 / 250 = 20%
• % change in price = ($2 - $2.50) / $2.50 = -$0.50 / $2.50 = -20%

PED = 20% / 20% = 1

B)  the PED is unitary, it means that for every 1% change in the price, the demand will inversely change in 1%

C) since Danny lowered its price 20% from $2.50 to $2, he sold 20% more brownies, but his total revenue fell from $625 to $600. If he lowers his price even more, this time 25% to $1.50, his total sales will increase to 375 brownies, but his total revenue will continue to fall to $562.50