Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. a. Is demand elastic or inelastic over this price range? b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?

Question

Business

Jax Johnston

26 June, 22:47

Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. a. Is demand elastic or inelastic over this price range? b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?

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Answers (1)

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Adam · Answer 1

A. Price Elasticity of Demand = 6; Elastic Demand

B. Price decline [$1.00 to $0.50] will increase Total Revenue.

Explanation:

Price Quantity

$1.5 100

$1 300

A. Price elasticity = %change in demand / %change in price

= ΔQ/ΔP x P/Q

200/0.5 X 1.5/100 = 400 x 0.015

Ped = 6. Demand is highly Elastic (>1), implying demand responds relatively more to price change.

B. Demand is Elastic (>1), implying %change in demand > %change in price. Price & Total Revenue are inversely related, price increase reduces total revenue & price decrease increases total revenue. So, in such case - price fall will increase Total Revenue