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12 March, 01:50

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 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, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?

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  1. 12 March, 03:56
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    A) the demand is elastic since the PED = 6

    B) total revenue will increase from $300 to $600

    Explanation:

    we can calculate the price elasticity of demand using the formula:

    PED = % change in quantity demanded / % change in price = [ (300 - 100) / 100] / [ (1 - 1.5) / 1.5] = (200 / 100) / (-0.5 / 1.5) = 2 / 0.33 = 6

    if the PED is the same when the price decreases from $1 to $0.50, total revenue will:

    when price = $1, total revenue = $1 x 300 = $300

    when price = $0.50, total revenue = $0.50 x 1,200 = $600

    *a 50% decrease in the price will cause a 300% increase ( = 50% x 6) increase in the quantity demanded = 300 units + (300 x 300%) = 1,200 units
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