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 each, he sells 100. at a price of $1.5 each, he sells 300. instructions: round your answer to 1 decimal place.
a. what is the elasticity of demand? 3.50 â± 0.1 .



b. is demand elastic or inelastic over this price range? .



c. if demand had the same elasticity for a price decline from $1.5 to $1 as it does for the decline from $2 to $1.5, would cutting the price from $1.5 to $1 increase or decrease danny's total revenue? .

Answer 1

Answer:

A) Price elasticity of demand = 8

B) PED is elastic

C) increase Danny's total revenue

Explanation:

we can calculate the price elasticity of demand using the formula:

PED = % change in quantity demanded / % change in price = [(300 - 100) / 100] / [(1.5 - 2) / 2] = (200 / 100) / (-0.5 / 2) = 2 / 0.25 = 8

if the PED is the same when the price decreases from $1 to $0.50, total revenue will    :

• when price = $1.50, total revenue = $1.50 x 300 = $450
• when price = $1, total revenue = $1 x 1,100 = $1,100

*a 33.33% decrease in the price will cause a 266.6% increase (= 33.33% x 8) increase in the quantity demanded = 300 units + (300 x 266.6%) = 300 + 800 = 1,100 units