Question

Adam makes specialized garden figurines in a small shop on his property, and his monthly total sales revenue is $800 when he charges $16 for each figurine. One month, he tried lowering his price to $14, and his total sales revenue that month was $840. On the basis of these data, what is the price elasticity of demand for Adam’s product? Round your answer to 2 decimal places.

Answer 1

Total Revenue = Price x Quantity

So we can find the quantity demanded from this formula for both the prices.

Price	Quantity Demanded	Total Revenue
$16	50	800
$14	60	840

Price elasticity of demand = % Change in Quantity demanded / % Change in Price

% Change in Quantity demanded = 60 - 50 / 50 x 100

% Change in Quantity demanded = 10 / 50 x 100

% Change in Quantity demanded = 20%

% Change in Price = 14 - 16 / 16 x 100

% Change in Price = -2 / 16 x 100

% Change in Price = -12.5%

Price elasticity of demand = % Change in Quantity demanded / % Change in Price

Price elasticity of demand = 20 / -12.5

Price elasticity of demand = 1.6

Negative sign is ignored in price elasticity of demand