You run a small business and would like to predict what will happen to the quant

Question

You run a small business and would like to predict what will happen to the quantity demanded for your product if you raise your price. While you do not know the exact demand curve for your product, you do know that in the first year you charged $53 and sold 1,060 units and that in the second year you charged $34 and sold 1,444 units. If you plan to lower your price by 10 percent, what would be a reasonable estimate of what will happen to quantity demanded in percentage terms? Incorporate the point elasticity of demand using the initial price and quantity in your answer. The quantity demanded will V by percent. (Enter your response rounded to two decimal places.)

Explanation / Answer

We have to calculate the elasticity of the demand first.

Ed = Percentage change in the demand/percentage change in the quantity.

percentage change in the demand = ( 1444 - 1060 ) / (1444 + 1060)

= 384 / 2504

= 0.153

Percentage change in the price = (34 - 53) / (34 + 53)

= -19 / 87

= - 0.21

Ed = 0.153 / -0.21

= -0.72.

If the small business lower the price of 10 the demand will change by  

-0.72 = x / -10

x = -0.72 x -10

x = 7.2

If the business lower the price by 10% the demand will increase by 7.2%

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