Answer to Question #181421 in Microeconomics for Rafat

Question

Due to the COVID-19, the price of hand-sanitizer increases from 150 taka to 250 taka. In response, the

 quantity demanded declines from 20 units to 15 units.

 (a) Calculate the price elasticity of demand.

Question 2.

 (b) Explain if the demand is elastic or inelastic. Based on the elasticity, what change (increase,

 decrease, or keep it the same) in price the seller can do to maximize his total revenue? Explain your

answer. 

Answer 1

(a)

Price elasticity demand =℅change in Q.D÷%change in price

Hence Percentage of quantity fall=[ {20-15}÷20]×100%

=25%

Percentage of price increase=[{250-150}÷150]×100%

=66.67%

Price elasticity demand=25%÷66.67%

=0.375

(b)

In this case the demand is price inelastic.Inelastic demand occur when % change of price is greater than % change in quantity demanded;Price elasticity demand<1

Price of sanitizer will suddenly rise.Sellers are willing to tolerate greater changes in price before they alter their behavior. With sudden rise in price, sellers would be unlikely to consider alternative or they aren't any alternative to consider.