The postal service of St. Vincent, an island in the West Indies, obtains a signi

Question

The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value St. Vincent stamps depicting a common theme, such as the life of Princess Diana. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service $.60 each. (The currency in St. Vincent is the East Caribbean dollar.) St. Vincent has been selling these souvenir sheets for $4.00 each and ordinarily sells about 52,000 units. To test the market, the postal service recently priced a new souvenir sheet at $5.00 and sales dropped to 40,000 units.

Estimate the price-elasticity of demand.

Explanation / Answer

Price elasticity of demand measure the rates of response of quantity demanded due to a price change. the formular is: PED= (%change in quantity demand)/(%percenet change in price)...
1. %Percent change in quantity demand =( new price - old price)/old price
= (40,000 - 52,000)/52,000 = -12,000/52,000= -.231

2. percent change in price = (price new - price old)/price old
= ($5 -4)/4 = $1/4 = 0.25

Price of Elasticty of demand = -0.231/0.25 = -0.923, The price elasticity of demand when price increase from $4 to $5 is 0.923

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