Question

Willie's widgets currently sell for $17 each. At that price, Willie has sold 39,000 widgets. Willie would like to maximize his revenue, so he raises the price of a widget to $20 each. Willie has seen the sales of his widgets drop only slightly to 37,000. Using the initial-value method, the price elasticity of demand for Willie's widgets is (Enter your response as an absolute value rounded to two decimal places.) We can conclude that the demand for Willie's widgets under these conditions is O A. perfectly inelastic. O B. inelastic. O C. elastic. unit elastic O D.

Answer 1

Ans) Price elasticity of demand is the responsiveness of quantity demanded to change in price. If it is more than one, good is elastic. If it is one, good is unit elastic and if it is less than 1, good is inelastic.

Price elasticity of demand carries a negative sign, which shows that as price increases quantity demanded decreases.

Absolute value means a value without any sign.

Price elasticity of demand = %change in quantity demanded ÷ %change in price

%change in quantity demanded = [(final quantity-initial quantity)/initial quantity]×100

= [(37,000-39,000)/39000]×100 = -5.13%

%change in price = [(final price-initial price )/initial price]×100 = [(20-17)/17]×100 = 17.65%

PED = (-5.13%)÷(17.65%) = |- 0.29| = 0.29 (inelastic)

Option b