Answer to Question #236706 in Microeconomics for iced

Question

A pen shop sells pen for 8php each and sold 250 pens per day on average. They estimate that the price elasticity of demand for pen is (-) 1.6. Calculate the expected number of customers if they reduce the pen price to 7php each.

Answer 1

Price elasticity of demand = $\frac{Percentage change in quantity demanded}{Percentage change in price}$

Change in price $= 8-7 = 1$

Percentage change in price = $\frac {1}{8}× 100 =$ 12.5%

When price elasticity of demand = (-) 1.6, the pen sales increases by $1.6 × 12.5 = 20$ %

= $\frac{20}{100} ×250 = 50$ extra pens sold

Expected number of customers $=250+50 = 300$