Question

1. Suppose the quantity demanded of ice cream rises from 200 to 300 units when the price falls from AED 10 to AED 5. What would be price elasticity?

a. Difficult to calculate with this information

b. -1 ( Unitary Elastic)

c. -0.75 ( Inelastic)

d. -1.25 ( Highly Elastic)

.

2. What would a manager do to increase the revenue, if he finds the product to be highly price elastic?

a. Increase the price

b. Keep the price same

c. Lower the Price

d. Increase the Advertisement

Answer 1

1. Option b

Elasticity is calculated using the below formula,

Ed = % change in Quantity/% change in Price = ((300-200)/200)/((5-10)/10) = 50%/-50% = -1

Hence the elasticity is -1, which is referred as unitary elastic

2. Option C

Highly elastic goods are sensitive to changes in price, so any decrease in price would increase the quantity demanded more, which would lead to increase in prices

For example

P	Q	% change in Q	% change in P	Ed	Total Revenue= P*Q
5.00	300.	0.40	-0.67
4.95	350	0.17	-0.01	-16.7	1732.5
4.9	400	0.14	-0.01	-14.1	1960