Ghose and Han (2014) found that the elasticity of demand for Google Play apps is

Question

Ghose and Han (2014) found that the elasticity of demand for Google Play apps is -3.7. This elasticity applies to a small college town where approximately 1,000 apps per month are sold. If price rises by 4%, what would be the effect on quantity demanded? The quantity demanded will decrease by 14.8 percent. (Enter your response rounded to one decimal place.) Would revenue rise or fall? Revenue would fall What is the percentage change in revenue? The change in revenue is percent. (Enter your response rounded to two decimal places.)

Explanation / Answer

Suppose initially 1000 units are being sold and price is x. When new price becomes 1.04x due to 4% rise, there is 14.8% reduction in output and so the new output being sold is equal to (85.2/100)*1000=852

Initial total revenue=x*1000=1000x

Final total revenue=1.04x*852=886.08x

Thus change in total revenue=1000x-886.08x=113.92x

%change in total revenue=(113.92x/1000x)*100=11.39%

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