Danny “Dimes” Donahue is a neighborhood’s 9-year old entrepreneur. His most rece
ID: 1141796 • Letter: D
Question
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 $2.00 each, he sells 200. At a price of $1.00 each, he sells 600.
a) What is the price elasticity of demand for Danny’s homemade brownies.
b) Is demand elastic, unit elastic or inelastic OVER this price range? b) Is demand elastic, unit elastic or inelastic OVER this price range?
c) If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $2.00 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny’s total revenue?
d) If at the price of $1.00 each, Danny sells 300 instead of 600, is demand elastic, unit elastic or inelastic OVER this price range?
e) Based on "D", If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $2.00 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny’s total revenue?
Explanation / Answer
a) PED = Q/P *( P1 + P2 / Q1 + Q2)
= (600 - 200) / (1 - 2) * (1 + 2) / (200 + 600)
= (400 / -1) * (3 / 800)
= 1200 / -800
= -1.5
The absolute value of PED is 1.5.
b) Since PED is greater than 1, it means demand is elastic over this price range.
c) Since demand is elastic, a percentage decrease in price will lead to more than a percentage increase in quantity demanded. Therefore, the total revenue will increase as price decreases from $1.00 to $0.50.
d) If at the price of $1.00 each, Danny sells 300 instead of 600
PED = Q/P *( P1 + P2 / Q1 + Q2)
= (300 - 200) / (1 - 2) * (1 + 2) / (200 + 300)
= (100 / -1) * (3 / 500)
= 300 / -500
= -0.6
The absolute value of PED is 0.6.
Since PED is less than 1, it means demand is inelastic over this price range.
e) Since demand is inelastic, a percentage decrease in price will lead to less than a percentage increase in quantity demanded. Therefore, the total revenue will decrease as price decreases from $1.00 to $0.50.
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