Question

A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?

1. When the price increases from $10 to $12, demand increases by 25%.

2. A 20% increase in the price causes a 25% fall in demand.

3. The demand for hats is inelastic.

4. The elasticity of demand is approximately 1.25.

Answer #1

statement 2 is correct.

1)

the demand decreases from 20 to 15, not increase.

incorrect statement

2)

change in quantity=(15-20)/20

=-25%

the quantity decreases by 25%

increase in price=(12-10)/10=20%

the statement is correct

3) and 4)

price elasticity of demand=(change in quantity demanded/average
quantity)/(change in price/average price)

change in quantity demanded=(15-20)=-5

average quantity demanded=(15+20)/2=17.5

change in price=(12-10)=2

average price=(12+10)/2=11

E=(-5/17.5)/(2/11)

=-1.57142857

second method

E=%change in quantity/%change in price

=-25/20

=-1.25

3 incorrect and 4 is correct

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