Answer to Question #18009 in Economics of Enterprise for ETA

Question

You run a small business and would like to predict what will happen to the quantity demanded for you product if you raise your price.While you do not know the exact demand curve for your product, you do know that in first year you changed 45 and sold 1200 units and that in the second year you charged 30 abd sold 1800.
a) if you plan to raise your price by 10 percent , what would be reasonable estimate of what will happen to quantity demanded in percentage terms
b)if you raise your price by 10 percent, will revenue increase or decrease

Answer 1

Price changed for 30/45 on 33%
Quantity changed in 1800/1200 on 50%
It means that price elasticity is 50%/33%=1,52

a) If price increases on 10% than Quantity will drop on 15,2% (1,52*10%)
b) Revenue will decrease because quantity drops faster than price increases