In: Economics
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," |
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.