Question

You sell hotdogs outside the library. Originally you sell your hotdog for $6 each and you sell
60 hotdogs per day. You trial seeling your hotdogs for $4 each and notice you sell 100
hotdogs.
  
a. Use the mid-point formula to calculate the % change in the price of hotdogs.

b. Use the mid-point formula to calculate the % change in the quantity of hotdogs sold.

c. Use a and b to determine the price elasticity of demand for selling hotdogs outside the
library. Is demand inelastic or elastic?

d. Explain using the elasticity you have calculated in in c, whether you should you set your
price at $6 or $4 in order to maximise total revenue?

e. Should you continue to raise your price above %$6 or lower it further below $4 in order
to maximise total revenue? When should you stop raising or lowering price to maximise
total revenue?

PLEASE EXPLAIN THE ANSWERS IN WORD FILE WITH DIAGRAM

Answer 1

a) Percentage change in price = P2-P1/(P2+P1/2)

= 4-6/(4+6/2)*100

= -2/5*100

= -40%

b) Percentage change in quantity = Q2-Q1/(Q2+Q1/2)

= 100-60/(100+60/2)*100

= 40/80*100

= 50%

c) Price elasticity of demand = percentage change in quantity/percentage change in price

= 50/-40

= -1.25

The demand is elastic

d) As the demand is elastic, so it should set P=4 to maximize revenue