Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts?

Question

Quizplus · Accepted Answer

The formula for elasticity of demand is % change in quantity demanded / % change in price. Using the information given, we can calculate the elasticity of demand as:

Elasticity of demand = (-5% / 15%) = -0.33

However, since elasticity is usually measured as a positive value, we take the absolute value of the result, giving us:

Elasticity of demand = 0.33

This suggests that the demand for haircuts at Fantastic Cuts is relatively inelastic, meaning that customers are not very price-sensitive and are still willing to buy haircuts even with a 15% increase in price. Therefore, based on this information, it may be a good choice for Fantastic Cuts to increase their prices.

Fantastic Cuts Hair Salon Knows That a 15% Increase in the Price