Answer to Question #255988 in Microeconomics for MG123

Question

You are a producer of instant noodles, and your research department has reported the price elasticity of demand for your product in the market is 0.5. You decide to increase the price from Rs. 10 to Rs. 12. What will be the new quantity demanded, which is currently 100,000 units?

Answer 1

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

Percentage change in price$=$ $\frac{2}{10}×100=20$ %

Price elasticity of demand$=$ 0.5 which means sales will decrease by 0.5$×20$ %$=$ 10%

So 10% of 100,000 units$=$ 10,000 units

Quantity demanded will decrease by 10,000$=$ 90,000 units