Suppose for a particular commodity, ε = 0.5 and that currently 40,000 units are selling for $8 each. How does a 1% increase in price affect the revenue

Answer 1

point price elasticity of demand = 1/2= .5

quantity demanded increases 50% for a 100% increase in price, 50/100 = 1/2 = .5

for a 1% increase in price, quantity demanded decreases 1/2 % = 0.5%= 0.005

at $8, 40,000 are sold

at $8.08, a 1% increase, 40,000(1-.005) = 39,800 are sold

revenue increases from 8x40000 = $320,000 to 8.08x39800= $321,584

= 321584/320000 = 0.495% increase in revenue for a 1% price increase

= an increase of $1,584 in revenue