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 $1.50 each, he sells 100. At a price of $1 each, he sells 300. a. Is demand elastic or inelastic over this price range? b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1, would cutting the price from $1.00 to $0.50 increase or decrease Danny’s total revenue?

Answer 1

Answer:

A) the demand is elastic since the PED = 6

B) total revenue will increase from $300 to $600

Explanation:

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

PED = % change in quantity demanded / % change in price = [(300 - 100) / 100] / [(1 - 1.5) / 1.5] = (200 / 100) / (-0.5 / 1.5) = 2 / 0.33 = 6

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

when price = $1, total revenue = $1 x 300 = $300

when price = $0.50, total revenue = $0.50 x 1,200 = $600

*a 50% decrease in the price will cause a 300% increase (= 50% x 6) increase in the quantity demanded = 300 units + (300 x 300%) = 1,200 units