Question

Part I Use the following information to answer the questions below.

observation	price	quantity
a	$4.00	16
b	$6.00	10

1.Calculate a price elasticity of demand. You must show all your work to earn credit.

2. Given the elasticity of demand, a 10% increase in price will cause quantity demanded to fall by what percentage? Explain your answer.

3. Is this demand elastic or inelastic? Explain your answer.

Part II Walmart advertises that it has rolled back prices. If Walmart is rolling back prices to raise revenues, should it roll back prices on products that have a price elasticity of demand that is elastic or inelastic. Explain your answer.

Answer 1

2- Since the price is rising by 10% hence as per the LAW OF DEMAND the quantity will fall by 7.5% .

3- Since the elasticity of demand is less than 1 i.e 0.75 hence the demand is inelastic.

4- The wallmart should role back its prices on the goods which are elastic because as soon as the price will decrease the quantity demanded will increase and the wallmart will earn greater profits.

Hence the prices of goods which are elastic should be rolled back.