Question

Assume you are selling a product in which at a price of $10, you can sell 90 units. When the price increases to $11, you can only sell 63 units. Given this change in price and sales, answer the following:

What is the price elasticity of demand for your product?

Is demand elastic, unit-elastic or inelastic?

What is the change in revenue for this product from the price increase?

Answer 1

Ans:

1) Calculation of price elasticity of demand

price elasticity of demand = % change in demand / % change in price

% change in demand = (63 - 90) / 90

   = -27 / 90

   = -0.3 or -30%

% change in price = ($11 - $10) / $10

   = $1/$10

   = 0.1 or 10%

price elasticity of demand = -30% / 10%

= -3

2) elastic

Since the price elasticity of demand is greater than one, we can say that the demand is elastic.   

3) Change in revenue = ($11 * 63) - ($10 * 90)

= $693 - $900

   = -$207

change in revenue for this product from the price increase is -$207.