Question

blossom, inc. sells 500 bottles of perfume a month when the price is $7. a huge increase in resource costs forces blossom to raise price to $9, and the firm only manages to sell 460 bottles of perfume. the price elasticity of demand is:

Answer 1

The price elasticity of demand for Blossom, Inc.'s perfume is approximately -1.25.

Step-by-step explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. The formula for price elasticity of demand (PED) is PED = (% Change in Quantity Demanded) / (% Change in Price).

Initially, Blossom, Inc. sells 500 bottles of perfume at a price of $7 each, resulting in total revenue of $3,500 (500 × $7). When the price increases to $9, the quantity demanded decreases to 460 bottles, yielding total revenue of $4,140 (460 × $9).

To calculate the percentage change in quantity demanded:

% Change in Quantity Demanded = ((New Quantity - Old Quantity) / Old Quantity) × 100

% Change in Quantity Demanded = ((460 - 500) / 500) × 100 = (-40 / 500) × 100 = -8%

To calculate the percentage change in price:

% Change in Price = ((New Price - Old Price) / Old Price) × 100

% Change in Price = (($9 - $7) / $7) × 100 = ($2 / $7) × 100 ≈ 28.57%

Now, using the formula for PED:

PED = (% Change in Quantity Demanded) / (% Change in Price)

PED = (-8%)/ (28.57%) ≈ -1.25

The negative sign indicates the inverse relationship between price and quantity demanded, confirming that the demand for Blossom, Inc.'s perfume is relatively elastic (as |PED| > 1), meaning a change in price led to a proportionately larger change in quantity demanded. This implies that consumers are responsive to price changes when purchasing this perfume.

Answer 2

The price elasticity of demand for Blossom, Inc.'s perfume is calculated as approximately 0.28, indicating that the demand is inelastic. Therefore, despite a price increase, the company manages to maintain a substantial quantity of perfume sales.

Step-by-step explanation:

The question requires calculating the price elasticity of demand for Blossom, Inc.'s perfume. With the provided information, the calculation would follow the formula for elasticity of demand [(percentage change in quantity demanded) / (percentage change in price)].

Given the figures: initial quantity = 500 bottles, new quantity = 460 bottles, initial price = $7, and new price = $9. The percentage change in quantity demanded is [(500 - 460) / 500] * 100 = 8%. The percentage change in price is [(9 - 7) / 7] * 100 ≈ 28.57%. Therefore, the elasticity of demand is 8% / 28.57% ≈ 0.28.

The calculated elasticity of demand of 0.28 indicates that the demand for Blossom's perfume is inelastic. When the demand is inelastic, a rise in price causes a less than proportional decrease in quantity demanded, which translates into the firm managing to maintain significant sales even after the price increase.