Question

A craftsman who makes guitars by hand finds that when he prices his guitars at $700 his annual revenue is 6,300. when he prices his guitars at $600, his annual revenue is $6,000. over this range of guitar prices, does the craftsman face elastic, unit-elastic; or inelastic demand?

Answer 1

Given:
Guitar Price Annual Revenue
700 6,300
600 6,000

Sales = number of units sold * unit price
number of units sold = Sales / unit price

number of units sold = 6,300 / 700 = 9 units
number of units sold = 6,000 / 600 = 10 units

The lower the price, the higher the number of units sold.

The demand is INELASTIC.

There is a formula used to determine the elasticity of demand. If its result is greater than 1, demand is elastic. If its result is less than 1, demand is inelastic.

elasticity of demand =[( Q1 - Q2) / (Q1 + Q2)] / [(P1 - P2) / (P1 + P2)]

elasticity of demand = (9 - 10) / (9 + 10) / (700-600) / (700 + 600)
elasticity of demand = -1/19 / 100/1300
elasticity of demand = -1/19 * 1300/100 = -1300 / 1900 = -0.68 less than 1. inelastic demand