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The price elasticity of demand is ˗0.5. If we cut prices by 6 percent,

revenue should fall by 3.2 percent.
sales should rise by 2 percent.
sales should fall by 2 percent.
revenue should rise by 3.2 percent

2 Answers

1 vote

Final answer:

The price elasticity of demand is -0.5. If we cut prices by 6 percent, sales should rise by 2 percent.

Step-by-step explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

In this case, the price elasticity of demand is -0.5, which means that a 1% decrease in price will result in a 0.5% increase in quantity demanded. Given this information, if prices are cut by 6%, sales should rise by 2% because the percentage increase in quantity demanded will offset the percentage decrease in price.

Therefore, the correct answer is sales should rise by 2 percent.

User Joffrey Outtier
by
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5 votes

Final answer:

The price elasticity of demand being -0.5 indicates inelastic demand. A 6 percent price cut would result in sales rising by 3 percent and revenue falling by 3 percent, not 3.2 percent.

Step-by-step explanation:

The concept being discussed in the question is the price elasticity of demand, which reflects how the quantity demanded of a good responds to a change in its price. In this scenario, the price elasticity of demand is given as -0.5, which implies that the demand is inelastic. This means that a price decrease will lead to a proportionally smaller increase in quantity demanded. Therefore, if prices are cut by 6 percent, we would expect that sales would rise, but not enough to increase total revenue. Given that the elasticity is less than 1, the effect of a price decrease on the quantity demanded will not offset the lower price, leading to a decrease in revenue. Since the price cut is 6 percent and the elasticity is -0.5, the sales should rise by 3 percent (6% x (-0.5) = -3%), and the revenue should fall by 3 percent. Hence, the correct answer is 'revenue should fall by 3 percent.'

User DermFrench
by
9.3k points

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