Question

1. Suppose the price of widgets rises from $7 to $9 and consumption of widgets falls...

1. Suppose the price of widgets rises from $7 to $9 and consumption of widgets falls from 25 widgets a month to 15 widgets. a. Calculate the percentage change in quantity and the percentage change in price b. Compute your price elasticity of demand of widgets. c. What can you say about your price elasticity of demand of widgets? Why? d. Is it a sound plan to increase the price of widgets?

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Answer #1

Price elasticity of demand = Percentage change in demand/Percentage change in price

Percentage change in demand = Q2-Q1/(Q2+Q1/2) = 15-25/(15+25/2) = -10/20 = -0.5

Percentage change in price = P2-P1/(P2+P1/2) = 9-7/(9+7/2) = 2/8 = 0.25

Price elasticity of demand = 0.5/0.25 = 2

As the elasticity is greater than 1 so the price elasticity of demand for widgets is elastic

No,it is not a sound plan to increase the price of widgets as the demand being elastic,the increase in price will cause the total revenue to decrease.

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