Danny \"Dimes\" Donahue is a neighborhood\'s 9-year-old entrepreneur. His most r

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 $2.5 each, he sells 250. At a price of $2 each, he sells 300. Instructions: Round your answer to 1 decimal place. What is the elasticity of demand? Is demand elastic or inelastic over this price range? If demand had the same elasticity for a price decline from $2 to $1.5 as it does for the decline from $2.5 to $2, would cutting the price from S2 to $1.5 increase or decrease Danny's total revenue?

Explanation / Answer

a. Price Quantity Sold % Change in Quantity % Change in Price Ed 2.5 250 2 300 20 -20 -1 Ed= % change in quantity demanded/% change in Price % change in quantity demanded = (300-250)/250 % Change in price = (2-2.5)/2.5 b. The elasticity over this range is unitary elastic, this means that due to 1% change in price the demand will also change exactly by 1 % c. If elasticity was same then If the demand for the good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case the two effects off-set each other. When demand is unit-elastic, the effects exactly balance; so a decrease in the price has no effect on total revenue

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