Question

Part a: A 20% increase in the price of a certain Product causes a 10% decrease in the quantity demanded. Is the demand for that Product Elastic____ or Inelastic_____? What is the Elasticity of Demand of this product_____?

Type your answer and explanation here:

Part b: The Elasticity of Demand of a certain Product is 0.4 If there is a 20% increase in price, the quantity demanded will the increase___ or Decrease____? By what percent will the quantity change? ____%

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Part c: We are looking at two businesses, Company A and Company B. Company A lowers its price of its product by 6% and sees an increase of about 12% in revenues. Company B tries a similar move: it lowers its price by 6% but sees its revenues go down by 3%. Using the concept of Elasticity, explain why company A and Company B are getting such different results.

Type your answer and explanation here:

Answer 1

Part A. Given change in Price = 20%

And Change in Quantity demanded = -10%(Decrease)

Elasticity is defined as percentage Change in Quantity demanded due to percentage change in Price.

Here, Percentage change in Price is more than Percentage change in Quantity demanded or Percentage Change in Quantity demanded is less than the Percentage change in Price.

When , Percentage Change in Quantity demanded is less than the Percentage change in Price, the Price Elasticity of demand is said to be Inelastic.

Or, In absolute terms, The Price elasticity of demand in this question would be 10%/20% = 0.5.

When Elasticity is less than 1, It is said to be Inelastic.

Therefore, the demand for the Product is inelastic

And, Elasticity of the Product =

percentage Change in Quantity demanded / percentage change in Price.

= - 10% /20% = 0.5

Negative sign shows the inverse relationship. Elasticity is always Positive

.Part b)

Since the sign of Elasticity is positive indicating the Positive relationship. It indicates that the Increase in Price will cause an increase in the quantity demanded.

If sign would be negative, Increase in Price would cause Decrease in Quantity demanded

Given : Price Elasticity of Demand = 0.4

And Percentage change in Price = 20%

We know,

Price Elasticity of demand =

percentage Change in Quantity demanded / percentage change in Price.

Therefore,

0.4 = Percentage change in Quantity demanded/ 20

=> Percentage Change in Quantity demanded = 0.4×20 = 8 %

Therefore, Quantity demanded will increase and Quantity Change = 8%

Part c) When the Price Elasticity of demand is Elastic and firm lowers it's Price, It results into Increase in its revenue because the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.

Whereas, When the Price Elasticity of demand is Inelastic and a firm lowers it's Price, It results into Decrease in the revenues of firm.because the percentage drop in price will result in an even lesser percentage increase in the quantity sold—thus Decreasing total revenue

Therefore,the reason of such different results Would be that The Price elasticity of Company A would be Elastic and of Company B would be Inelastic