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 9%, what would be the effect on quantity demanded? The quantity demanded will ? by percent. Enter your response rounded to one decimal place. Would revenue rise or fall? .) Revenue would What is the percentage change in revenue? The change in revenue is percent. Enter your response rounded to two decimal places)

Explanation / Answer

Answer to blank 1: Decrease

Answer to blank 2: 33.3%

Answer to blank 3: Fall

Answer to blank 4: 27.30%

Explanation:

Elasticity of Demand = % change in quantity demanded / % change in price

-3.7 = % change in quantity demanded / 9%

% change in quantity demanded = -3.7 * 9% = 33.3%

So, quantity demanded will decrease by 33.3%

Since, the absolute value of elasticity of demand is greater than 1, it means demand is elastic. So, a rise in price will lead to fall in revenue.

Suppose initial price was $100 and the quantity is 1000

Total revenue before price change = $100 * 1000 = $100000

Price increase by 9%. So, new price is $109

Quantity demanded decreases by 33.3%. So, new quantity is 667

Total revenue after price change = $109 * 667 = $72,703

% change in revenue = [(72,703 - 100000) / 100000] * 100 = -27.30% (Here - sign means revenue decreases)

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