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A manufacturer reduces the price of its digital cameras by from OMR 100 to 80 and,...

A manufacturer reduces the price of its digital cameras by from OMR 100 to 80 and, as a result, the volume of sales as demanded in the market rises from 200 to 600 units. Answer the questions: Q1. Calculate the price elasticity of demand with clear steps of working. [4marks] Q2. The observed value belongs to which type price elasticity demand. [1mark] Q3. Based on the answer of question 1 and question 2 analyse the elasticity graph and explain in your own words. (5marks]


Solutions

Expert Solution

Q1. Calculate the price elasticity of demand with clear steps of working.

Price Elasticity of Demand = Percentage Change in Quantity demanded / Percentage Change in Price

Percentage Change in Quantity demanded = (600 -200) /200

= 200%

Percentage Change in Price = 80 -100 /100 = -20%

Therefore

Price Elasticity of Demand = 200%/-20% = -10

Negative sign indicates inverse relationship between increase in price and increase in demand.

Q2. The observed value belongs to which type price elasticity demand.

The observed value belongs to elasticity elastic type price elasticity demand as it is more than one. That means if there is one percentage change in price, demand will increase more than one percentage

Q3. Based on the answer of question 1 and question 2 analyze the elasticity graph and explain in your own words.

Question 1 and question 2 indicates that the percent change in demand is more than the percent change in price or corresponding increase in percentage of demand is more the percentage cut in the price. The revenue will increase from the price cut because demand is relatively more elastic.

Revenue before Price change = Price * quantity demanded = 100 * 200 = 20,000

Revenue after Price change = Price * quantity demanded = 80 * 600 = 48,000

jeff jeffy answered 1 year ago
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