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Abs Co makes and retails fitness equipment and is launching a new product, the cruncher. Abs co has done some market research and the following information is available.
At a price of $32, it is believed that 4000 units will be sold, but if the price rises to $40, 5% less units will be sold.
assuming demand is linear, what is the demand function for the cruncher product and what is the price elasticity of demand at $40.
the answer for this question is
p =192 – 0.04q and the PED is 0.263.
my doubt is in the way they have calculated the PED.in the working given the change in price is calculated a :
(4000-3800)/3800 / (32-40)/40 = -0.263according to my knowledge, shouldn’t the working be as follows:
(4000-3800)/4000 / (40-32)/32 = 0.2
If the question has asked for the PED at $32, then your workings would be correct.
However, the question asks for the PED at $40, and so it is the change from the demand at 40 (3,800) dividend by the change from the price of $40.
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