George has been selling 8,000 T-shirts per month for $8.00. When he increased th

Question

George has been selling 8,000 T-shirts per month for $8.00. When he increased the price to $9.00, he sold only 7,000 T-shirts.

Which of the following best approximates the price elasticity of demand?

A. -1.2467

B. -1.02

C. -0.5667

D. -1.1333

Suppose George's marginal cost is $3 per shirt.

Before the price change, George's initial price markup over marginal cost was approximately

A. 0.5625

B. 0.375

C. 0.625

D. 0.6875

George's desired markup is?

A. 1.3235

B. 0.7941

C. 0.9706

D. 0.8824

Since George's initial markup, or actual margin, was (LESS OR GREATER) than his desired margin, raising the price was (PROFITABLE OR NOT PROFITABLE).

Explanation / Answer

The quantity demanded is Q1 = 8,000 T-shirts per month when the price is P1 = $8.00. Now that the price is increased to P2 = $9.00, Quantity demanded falls to 7,000 T-shirts. Use the mid point formula

Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

Find that ed is -1.13. Hence option D is correct

Suppose George's marginal cost is $3 per shirt. Before the price change, George's initial price markup over marginal cost was given by (P - MC)*100/P = (8 - 3)*100/8 = 62.5% or 62.5. Hence option C is correct.

George's desired markup is 0. 7941 so Option B is correct. George's initial markup is LESS than his desired margin, which implies that raising the price was NOT PROFITABLE.

Q1 Q2 P1 P2 Q2-Q1 (Q2+Q1)/2 %Q P2-P1 (P1+P2)/2 %P Ed 8000.00 7000.00 8.00 9.00 -1000.00 7500.00 -13.33 1.00 8.50 11.76 -1.13

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