Danny “Dimes” Donahue is a neighborhood’s 9-year-old entrepreneur. His most rece
ID: 1216825 • Letter: D
Question
Danny “Dimes” Donahue is a neighborhood’s 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.5 each, he sells 250. At a price of $1 each, he sells 300. a. What is the elasticity of demand? . b. Is demand elastic or inelastic over this price range? . c. If demand had the same elasticity for a price decline from $1 to $0.5 as it does for the decline from $1.5 to $1, would cutting the price from $1 to $0.5 increase or decrease Danny’s total revenue? .
Explanation / Answer
Answer (a.)
Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.
At a price of $1.5 demand = 250
At a price of $1 demand = 300
Therefore, Price Elasticity = % Change in Quantity Demanded / % Change in Price
= 20% / -33.33%
= - 0.6
The elasticity of demand for homemade brownies is -0.6
Answer (b.)
As we know,
Elasticity Value Description
Ed = 0 Perfectly inelastic demand
-1 < Ed < 0 Inelastic or relatively inelastic demand
Ed = -1 Unit elastic, unit elasticity, unitary elasticity, or
unitarily elastic demand
- < Ed < -1 Elastic or relatively elastic demand
Ed = - Perfectly elastic demand
from the above table of elasticity, the elasticity of demand for homemade brownies is inelastic or relatively inelastic.
Answer (c.)
Elasticity is given -0.6
For a 50% decrease in Price, the corresponding change in Quantity demanded would be 30%
( Because 50*0.6 = 30) -------- eqn 1
Let the no of units sold at Price $0.5 be X
[(X-300)/300]*100=30 -- - - - (from eqn 1)
Simplifying this we get X=390
Therefore,
Total Revenue when Price is $1.5 = 1.5*250 = $375/-
Total Revenue when Price is $1.0 = 1.0*300 = $300/-
Total Revenue when Price is $0.5 = 0.5*390 = $195/-
If demand had the same elasticity for a price decline from $1 to $0.5 as it does for the decline from $1.5 to $1, cutting the price from $1 to $0.5 would decrease Danny’s the Total Revenue from $300 to $195.
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