Save & E Question 2 (of 6) 2. thet he bakes himseit At a price of $2.25 each, he

Question

Save & E Question 2 (of 6) 2. thet he bakes himseit At a price of $2.25 each, he sells 250. At a Danny Dimes Donahue is a neighborhood's 9 year-old entrepreneur. His most recent venture is selling homemade brownies price of $175 each, he seils 300 Instructions: Round your answer to 1 decimal place a. Whet is the elasticity of demand? b. Is demand elastic or inelastic over this price range? (Click to select) c If demand had the same elasticity for a price dedine from $175 to $1.25 as it does for the decline from $2.25 to $1.75, would cutting the price from $175 to $1.25 increase or decrease Denny's total revenue? (Click to select 3 5 6 7 8 9 0

Explanation / Answer

PE = (P1 + P2)/(Q1 + Q2) x (Q2 - Q1)/(P2 - P1)

Elasticity of demand = 4/(250 + 300) x (300 - 250)/(1.75 - 2.25) = - 0.7

Demand is inelastic as abs (PE) < 1

A price decrease would reduce total revenue as price decrease would increase the quantity demanded by a proportion less than the decrease in price, thus total revenue decreases.

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