Question

Each scenario below gives some information about price elasticity of demand for a firm. Use this information to answer the questions. Round answers to two places after the decimal where applicable. Honest Abe's Used Cars estimates the price elasticity of demand for their cars to be 4.60 . Last month, Abe tried a new marketing scheme which decreased the number of cars sold by 67 %.
Abe must have_________ prices. Therefore, Abe's total revenue ____________ Abe's prices must have changed by:________%
At Webs-R-Us, a website design company, the new manager has decided to increase the price of Webs-R-Us services by 45%.
If Webs-R-Us has a price elasticity of demand at 0.70, we can expected the number of websites designed to ___________

Answer 1

Answer:

increased

fell

14.57%

decrease

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

Honest Abe's Used Cars has an elastic demand because its coefficient of elasticity is greater than one. Because demand is elastic, a rise in price would lead to a decrease in the number of cars sold. If price is increased, demand would fall more than the change in price, so total revenue would fall.

4.6 = 0.67 / percentage change in price

Percentage change in price = 0.67 / 4.6 = 0.1457 = 14.57%

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Webs-R-Us services has an inelastic demand.

If prices are increased, demand would fall but it would fall less than the increase in price

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded