Answer to Question #206643 in Economics of Enterprise for abiy

Question

Assume you are managing a food processing plant in Ethiopia. The demand function

for one of your product is given as Qd=50-2p. (8 marks)

a) Find the point price elasticity if price is 15 ETB? Is it elastic or inelastic?

b) How do you interpret the elasticity result?

c) In order to get more revenue what will be your recommendation. Is it to increase

price or decrease price? Why?

d) Describe at least four determinants of the price elasticity demand for the food

product?

Answer 1

a) At P = 15: Q = 50 - 2×15 = 20 units.

The point price elasticity at price of 15 ETB is:

$Ed = -2×15/20 = -1.5,$ so the demand is elastic.

b) The elastic demand means, that the change in price will cause the higher change in quantity.

c) In order to get more revenue the recommendation is to lower the price.

d) The four factors that affect price elasticity of demand are (1) availability of substitutes, (2) if the good is a luxury or a necessity, (3) the proportion of income spent on the good, and (4) how much time has elapsed since the time the price changed.