A firm has just increased its price by 4 percent over last year’s price, and it...

A firm has just increased its price by 4 percent over last year’s price, and it found that quantity sold decreased by 2 percent.

a. What is its price elasticity of demand?

Instructions: Enter your response rounded to one decimal place.

The price elasticity of demand is .

b. What additional information would you search for before you did your calculation?

Expert Solution

Price elasticity is measure of the responsiveness in quantity demanded to a change in price. It's the rate of percentage change in quantity demanded to the percentage change in price.

Percentage change in quantity demanded = 2% decrease

Percentage change in price = 4% Increase.

Elasticity of demand = -2/4 =- 0.5

If we take absolute value , Elasticity of demand = 0.5

b) price elasticity of demand can be calculated if you know the percentage change in price and percentage change in quantity demanded.

It can also be calculated if the initial price, new price, initial quantity demanded and the quantity demanded after change in price are given.

Rahul Sunny answered 2 years ago

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