Question

Question 6 Suppose you are advising an industry association on the predicted effects of a price change on quantity demanded and total expenditure on their product. The current price is $1.00 per unit, and quantity demanded is 2,500 units per day. Based on extensive empirical studies, you know that price elasticity of demand for the product is -0.5. If the price increases to $2.00 per unit: 6.1 What is the predicted percentage change in quantity demanded? 6.2 Will total expenditure increase or decrease? (HINT: Use the midpoint formula to calculate the percentage change in price).

Answer 1

6.1)

Percent change in price=(2-1)/[(2+1)/2]=2/3=66.67%

Price elasticity of demand=e=-0.50

Predicted change in quantity demanded=e*Percent change in quantity=-0.5*66.57%=-33.33%

6.2)

Since percent decrease in quantity demanded is less than the percent increase in price. Total expenditure will increase.