Question

Cough drop’s regular price is $3.80 and sells 810 bags. When price increases to $4.20, 790 bags are still sold. The revenue at the regular price is $3.80 * 810 = $ 3,078 and revenue at the higher price is $4.20 * 790 = $ 3,318

1)Increasing this item’s price made its revenue RISE/FALL

2)The above item’s price elasticity of demand is ELASTIC/INELASTIC

3) The above item’s price elasticity of demand has an absolute value LESS/GREATER than 1.0. The item’s price elasticity of demand is calculated to be:

Answer 1

1) RISE. When the price is increased from $3.8 to $4.2, the revenue goes up from $3,078 to $3,318.

2) INELASTIC: When the percentage change in demand is smaller than the percentage change in price, price elasticity is said to inelastic.

3) The formula to calculate price elasticity of demand is:

Usually, we take the absolute value of price elasticity because for most cases, price and demand move in opposite directions which means that -ve sign is always a given.

So at 0.23 price elasticity is less than 1, which means that demand doesn't change as rapidly as price.