Question

If the Price elasticity of demand changes from -1.2 to -1.4, then the optimal markup will change from:

Select one:

a. 250 to 500

b. 300 to 200

c. 500 to 250

d. 500 to 200

Answer 1

The price markup is equal to the inverse of price elasticity of demand. So, lower the price elasticity higher will be the markup, and higher the price elasticity lower will be the markup.

Since, the price elasticity of demand has increased so it means the optimum markup must have decline.

Now, when price elasticity is – 1.2 the markup is

1/1.2 = 0.833

On the other hand, when the price elasticity is – 1.4 the markup is

1/1.4 = 0.714

So, the percentage change in the markup is 300 to 200.