Question

Your boss at Johnson’s Sports Shop has just come to you and asked if he should raise the price of canoes in an attempt to generate more revenue. To correctly answer her, you collect the following data on recent sales. In April when the price of a canoe was $350, you sold 12 canoes. In May when the price of a canoe was $375, you sold 10 canoes. Using the midpoint (arc) elasticity formula, calculate the price elasticity of demand and report what advice (about changing the price) you would give to your boss. [10 pts]

Please complete :)

Answer 1

Ans: The price elasticity of demand is -2.63

Boss should not increase price. If he wants to increase revenue then he should decrease the price of canoe.

Explanation:

Initial price ( P1) = $350

New price ( P2) =$375

Initial quantity ( Q1) = 12

New quantity ( Q2) = 10

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 10 -12 ) / ( 375- 350) } * {( 350 + 375) / ( 12 + 10)}

= ( -2 / 25 ) * ( 725 / 22)

= -0.08 * 32.95

= -2.63

Here , price elasticity of demand is elastic.

When demand is elastic , then decrease in price will lead an increase in total revenue.

When demand is elastic , then increase in price will lead a decrease in total revenue.