Question

The current price for a good is ​$25​, and 100 units are demanded at that price. The price elasticity of demand for the good is negative 1. When the price of the good drops by 4 percent to ​$24​, consumer surplus increases by ​$ nothing. ​(Enter your response to the nearest​ penny.)

Answer 1

Consumer surplus increases by $2

Step-by-step explanation:

The consumer surplus can be defined as the benefit that consumers gain when they pay less for a good that they are willing to pay more for.

a). Determine the final demand as follows;

Price elasticity of demand=% change in price/% change in demand

where;

price elasticity of demand=-1

% change in price={(Final price-initial price)/initial price}×100

Final price=$24

initial price=$25

% change in price=(24-25)/25=(1/25)×100=-4%

% change in demand=x

replacing in the original expression;

-1=-4/x

x=4%

% change in quantity={final quantity-initial quantity/initial quantity}×100

let final quantity=y

4%={(y-100)/100}×100

0.04=(y-100)/100

4=y-100

y=4+100=104

final quantity=104 units

Consumer surplus=(1/2)×change in price×change in quantity

where;

change in price=25-24=1

change in quantity=104-100=4

Consumer surplus=(1/2)×1×4=2

Consumer surplus increases by $2