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3 October, 12:36

Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $2.75 each, he sells 250. At a price of $2.25 each, he sells 300. A. What is the elasticity of demand?

B. Is demand elastic or inelastic over this price range?

C. If demand had the same elasticity for a price decline from $2.25 to $1.75 as it does for the decline from $2.75 to $2.25, would cutting the price from $2.25 to $1.75 increase or decrease Danny's total revenue?

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  1. 3 October, 12:52
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    A) PED = 1.1

    B) demand is elastic

    C) Danny's total revenue would decrease

    Explanation:

    we can calculate the price elasticity of demand using the formula:

    PED = % change in quantity demanded / % change in price = [ (300 - 250) / 250] / [ (2.25 - 2.75) / 2.75] = (50 / 250) / (-0.5 / 2.75) = 0.2 / 0.18 = 1.1

    since PED = 1.1, the demand is elastic

    if the PED is the same when the price decreases from $2.25 to $1.75, total revenue will:

    when price = $2.25, total revenue = $2.25 x 300 = $675

    when price = $1.75, total revenue = $1.75 x 373 = $652.75

    *a 22.22% decrease in the price will cause a 24.44% increase ( = 22.22% x 1.1) in the quantity demanded = 300 units + (300 x 24.44%) = 373.3 ≈ 373 units
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