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 $1.5 each, he sells 100. At a price of $1 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?  (Click to select)  Elastic  Inelastic  .

c. If demand had the same elasticity for a price decline from $1 to $0.5 as it does for the decline from $1.5 to $1, would cutting the price from $1 to $0.5 increase or decrease Danny’s total revenue?  (Click to select)  Increase  Decrease  .  

Answer 1

Initial Price (PI) = 1.5, New Price (PN) = 1,

Initial Quantity (QI) = 100, New Quantity (QN) = 300.

a.

PED = ((QN − QI) / (QN + QI) / 2) / ((PN - PI) / (PN + PI) / 2 )

PED = ((300 − 100) / (300 + 100) / 2) / ((1 - 1.5) / (1 + 1.5) / 2)

PED = 0.25 / -0.1

PED = -2.5

In absolute value it will be 2.5 (Using Mid-point Method)

b.

The demand is elastic. (PED > 1)

c.

The total revenue will increase.

When the demand is elastic and there will be a decrease in the price, the total revenue in this condition always increases.