Question

Ahmed runs a small business. In the first year he charged $45 and sold 1200 units...

Ahmed runs a small business. In the first year he charged $45 and sold 1200 units and in the second year he charged $30 and sold 1800 units. Calculate the price elasticity of demand (Use the midpoint method). If Ahmed plans to raise the price by 10%, indicate what would be a reasonable estimate of what will happen to the quantity demanded and to the total revenue?
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Answer #1

Price Elasticity of Demand = (Q2 - Q1) /[ (Q2 +Q1)/2] ÷ (P2 - P1) / [( P2+ P1) /2]

Q1 = 1200 , Q2 = 1800 , P1 = $45 , P2 = $30 Elasticity = 1800 -1200 /[( 1800+1200)/2] ÷( 30-45)/[(45+30)/2]

Elasticity of Demand = 600/1500 ÷ (-)15 /37.5 = 2/5 × 37.5/15 = 1 ( unitary elastic)

Percentage decrease in price = 50

Percentage increase in quantity = 50

If Price is raised by 10% then it would be $33 (30+3), then demand would be dercesed by 10% because Elasticity of demand is 1 and demamd = 1800 - 180 = 1620 units.

Now,Total Revenue = Price × Demand = 33×1620 = $53460

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