Question

. You run a small business and would like to predict what will happen to the quantity demanded for your product if you raise your price. While you do not know the exact demand curve for your product, you do know that in the first year you charged $20 and sold 10,000 units and that in the second year you charged $24 and sold 9,000 units. If you plan to raise your price by 20%, what would be a reasonable estimate of what will happen to quantity demanded in percentage terms? If you raise your price by 20%, will revenue increase or decrease?

Answer 1

According to the given information , the price elasticity of demand of my product is {(9000-10000)/10000} / {(24-20)/20} = -0.1/0.2 = -0.5

thus we can say that in price of my product increases by 1 percent the demand for my product will fall by 50 percent.

thus we can say that if I raise my price by 20 percent after year 2 the demand for my product will fall by 100 percent thus no one will want to buy my product at all after increasing price. Thus if I rise my price by 20 percent my revenue will fall or decrease as no one will intend to buy my product at all.