PED

1 .A shopkeeper finds that if he sets the price of a particular product at $9.00 per unit he sells, on average, 150 units of the product per month. However, at a price of $10.00 per unit, he sells an average of 110 units per month.

What is the price elasticity of demand for the product?

A.0.42
B.2.40
C.0.27
D.0.11
The correct answer is B.

WORKING

Proportional change in quantity demanded = 40/150 × 100 = ?26.6%

Proportional change in price = 1/9 × 100 = 11.1%

PED = ?26.6/11.1 = ?2.40

2. Abel Co currently sells its major product line for $25, at which price monthly demand is 4,000 units. Market research has suggested that a cut in price of $1 would increase monthly sales by 800 units and that the demand curve is linear.

If P denotes selling price in $ and Q monthly demand in thousands of units, which of the following correctly describes the demand curve?

A.P = 30 ? 0.00125Q
B.P = 30 ? 1.25Q
C.P = 24 ? 0.8Q
D.P = 24 ? 800Q
The correct answer is A.

WORKING

Demand curve is of the form P = a ? bQ

b = ?1/800 = ?0.00125; a = 25 + (0.00125 × 4,000) = 30

Demand curve is P = 30 ? 0.00125Q

why does the first question use percentage in change while the second question uses the absolute figure instead of percentage in change in the calculation?