Question

Suppose your company adopts a new technology that allows for output to increase by 12%. Suppose the elasticity of demand is -3. What percentage should you change your price by to sell all of the increased output?

Answer #1

Price elasticity of demand Ed = Percentage change in quantity demanded/percentage change in price | |||||||||

The quantity demanded will increase by 12% when the supply is increasing by 12%. | |||||||||

(-3) = 12%/percentage change in price | |||||||||

percentage change in price = 12%/(-3) | |||||||||

percentage change in price = -.04 | |||||||||

When quantity demanded increases by 12% the percentage | |||||||||

change in price is -4%. | |||||||||

To ensure that all the output sells, you should decrease the price by 4%. |

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Demand Schedule
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Price
Quantity
Demanded
(income = $10,000)
Quantity
Demanded
(income = $12,000)
of demand as the price of DVDs
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$8
40 DVDs
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32
45
$12
24
30
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16
20
$16
8
12
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