Question

When Walmart sells a blanket for $10, they sell 400 a month. When they lower the price to $8, they sell 500 a month. If next month they price the blanket at $11.40, how many units would be predicted to sell?

Answer 1

Answer :

Initial case :

Price decrease is = $10 - $8 = $2

% change in price = ( - $2 / $10) * 100 = - 20%

Quantity increase = 500 - 400 = 100

% change in quantity demanded = (100 / 400) * 100 = 25%

Therefore : Price elasticty of demand = % change in quantity demanded / % change in price = 25% / - 20% = - 1.25

Thus when price increases to $11.40

Increase in price = $11.40 - $10 = $1.40

% chane in price = ($1.40 / $10) * 100 = 14%

Note :

Price elasticty of demand = % change in quantity demanded / % change in price

- 1.25 = % change in quantity demanded / 14%

% change in quantity demanded = - 1.25 * 14% = -17.5% , that is decrease in quantity demanded by 17.5%.

Therefore new quantity expected to be sold = 400 - (400 * 17.5%) [that is the new quantity demanded after price increase] = 330 units (Answer)