Question

​Willie's widgets currently sell for

​$2020

each. At that​ price, Willie has sold

48,000

widgets. Willie would like to maximize his​ revenue, so he raises the price of a widget to

​$2222

each. Willie has seen the sales of his widgets drop only slightly to 47,000.

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

A.

unit elastic.

B.

perfectly inelastic.

C.

inelastic.

D.

elastic.

Click to select your answer and then click Check Answer.

Answer 1

Price is increased from $20 to $22 an increase of $2 or 2/20 = 10 percent. Quantity is decreased by 1000 units from 48000 to 47000, which is the decline of 1000/48000 = 2.083 percent. price elasticity of demand is the ratio of percentage change in the quantity demanded to the the percentage change in the price. In this way the price elasticity of demand is -2.083% / 10% or 0.21

Since the price elasticity of demand is less than 1, we predict that the demand is inelastic. Select option C.