Question

In: Economics

The own price elasticity of demand for Good Y is -1.75. Management reduces the price of...

The own price elasticity of demand for Good Y is -1.75. Management reduces the price of Good Y by 5% to stimulate demand.

As a result of this "pricing strategy,"

Solutions

Expert Solution

Price Elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in it's price. It is calculated as-

Price Elasticity of demand= % change in quantity demanded / % change in price

Given that own price Elasticity of demand for good Y is -1.75. management reduces the price of good Y by 5% . So, % change in price= -5% ( negative sign indicates a decrease)

Substituting the given values-

-1.75= % change in quantity demanded / (-5%)

Cross multiplying-

% change in quantity demanded= -1.75 x -5%

% change in quantity demanded= 8.75%

hence, a positive 8.75% change in quantity demanded shows that quantity demanded has increased. Hence, as a result of this pricing strategy, QUANTITY DEMANDED OF GOOD Y WILL INCREASE BY 8.75% . As percentage increase in quantity demanded is more than percentage decrease in price, TOTAL REVENUE for good Y will INCREASE.


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