Question

The campus bookstore has decreased prices on pens and pencils in order to increase total revenue from sales of these items. Therefore, the manager of the campus bookstore believes that the demand for pens and pencils at the bookstore is

A) inelastic.

B) unit-elastic.

C) perfectly inelastic.

D) elastic.

Tim has a bakery business. If he sets the price of a dozen donuts at $9 he can sell 250 dozen a week. If he sets the price of a dozen donuts at $11 he can sell 150 dozen a week.The absolute value of the price elasticity of demand is

A) 2.5.

B) 0.40.

C) 50.

D) 0.02.

Answer 1

Q1
Answer
Option D
elastic
A revenue is maximum when the demand is unit elastic.
Elasticity and price are positively related so if the price is decreased means the demand was elastic and decreased up to the elasticity of price is unit elastic.

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Q2
Answer
option A
Elasticity of demand=(change in quantity/average quantity)/(change in price/average price)
Change in quantity=150-250=-100
average quantity=(150+250)/2=200
change in price=11-9=2
average price=(11+9)/2=10
Elasticity of demand=(-100/200)/(2/10)
=-2.5
=2.5 (absolute value)

The absolute value of elasticity is 2.5.
The demand is elastic as the elasticity is above 1 in absolute value.