When Apple raised the price of a song download from 99 cents to $1.29, demand fo

Question

When Apple raised the price of a song download from 99 cents to $1.29, demand for Grizzly Pioneer's latest hit fell to 90,000 units sold from 110,000 units sold in the previous week.

A. What is average price? What is average quantity sold?

B. Using average price as the base value, what si the percent change in price? Using average quantity as the base value, what is the percent change in quantity sold?

C. Calculate the song's arc elasticity of demand.

D. Is demand for the song elastic or inelastic? Explain.

E. Does sales revenue increase, decrease, or stay the same as a result of the price increase? How does your answer relate to your answer in D? Explain.

Explanation / Answer

a. Average price=(1.29+99)/2=$1.14

Average quantity=(90,000+110,000)=$100,000

b. Taking average price as the base value,

percenatge change in price=1.29-1.14/1.14=0.13=13%

Percantage change in quantity(taking average quantity as the base value)=110,000-100,000/100,000=.10=10%

d. elasticity of demand =% change in quantity demanded/% change in price

=10/13

=.76

This means that the demand is inelastic

e. sales revenue initially=.99*110,000=$108900

sales revenue after the price raise

1.29*90,000=1$16100

total revnue increases becauuse demand is inleastic.

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