TTV Corporation's managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5,000 and total variable costs are $4,000, based on production of 400 units. The following values may be useful: ln (0.2)= -1.609 ln (1.5)= 0.405
Ln (0.5)= -0.693 ln (4,000)= 8.294
Ln (0.8)= -0.223 ln (5,000)= 8.517
TTV's price elasticity of demand is:

Question

Quizplus · Accepted Answer

Using the midpoint formula, we can calculate the price elasticity of demand:

Elasticity = [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]

We are given that a 50% increase in price causes an 80% reduction in quantity, so we can use these values for P2/P1 and Q2/Q1:

Elasticity = [(0.2)/((1+0.2)/2)] / [(1.5-1)/((1.5+1)/2)]
Elasticity = [-1.609] / [0.405]
Elasticity = -3.973

Since the price elasticity of demand is negative, we know that demand is price-sensitive. -3.973 indicates that the product is highly elastic, meaning that a change in price will have a large impact on quantity demanded.

TTV Corporation's Managers Estimate That a 50% Increase in Price