A car dealer wants to get rid of the stock of last year's model.Assume that the dealer knows from past experience that the price elasticity of demand for cars is unitary (= 1).If the price of the cars is currently $20,000 and the dealer wants to increase the quantity demanded from 30 units to 50 units,what must the new price be if the dealer is to sell the 20 additional cars?
A)$10,000
B)$12,000
C)$16,000
D)$18,000

Question

Quizplus · Accepted Answer

With unitary price elasticity of demand, the percentage change in quantity demanded is equal to the percentage change in price. To increase quantity demanded from 30 to 50 units, which is a 66.67% increase ((50-30)/30*100), the price must decrease by the same percentage. A decrease of 66.67% from the original price of $20,000 would not result in $12,000, indicating a mistake in the calculation based on the given elasticity. The correct approach involves understanding that with unitary elasticity, the total revenue remains constant. Therefore, the correct calculation should focus on finding the price that maintains the same total revenue with the increased quantity demanded. However, the provided explanation and choices seem to misinterpret the application of unitary elasticity, as none of the choices directly align with a 66.67% decrease. The correct approach would involve calculating the new price that keeps total revenue constant, given the increase in quantity demanded.

A Car Dealer Wants to Get Rid of the Stock