Question

Suppose your company adopts a new technology that allows for output to increase by 12%. Suppose...

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?

Homework Answers

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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