Answer:
Midpoint formula = - 7.43
Other formula = - 4.88
Elastic PED - Decrease price to increase total revenue
Explanation:
Price elasticity of demand is the responsiveness of quantity demanded to a change in price. The midpoint formula calculation is as follows:
(Q2 - Q1) / [(Q2 + Q1/2]
(P2 - P1) / [(P2 + P1/2]
In this scenario:
Q1 = 433 (old quantity)
Q2 = 169 (new quantity)
P1 = 0.88 (old price)
P2 = 0.99 (new price)
When this is substituted into the formula, it is as follows (I shall do it one step at a time to make it easier):
(169 - 433) / [(169 + 433/2]
(0.99 - 0.88) / [(0.99 + 0.88/2]
(169 - 433) / 301
(0.99 - 0.88) / 0.935
- 264 / 301
0.11 / 0.935
- 0.877
0.118
PED = - 7.43 (PED is always a negative figure because price and quantity demanded have an inverse relationship. i.e. when one falls, the other rises)
PED is elastic if it is more than 1 and elastic if it is less than 1.
In this case, 5.8 is more than 1, hence PED is elastic.
In such a case, a change in price will always lead to a higher change in quantity demanded. Therefore, it is important to decrease the price to increase total revenue.
However, a different answer can be obtained using a different PED calculation
% change in quantity demanded
% change in price
(Q2 - Q1) / Q1
(P2 - P1) / P1
(433 - 169) / 433
(0.99 - 0.88) / 0.88
0.61
0.125
PED = - 4.88
