A craftsman who makes guitars by hand finds that when he prices his guitars at ​$1 comma 400

Question

​,
his annual revenue is ​$2 comma 800
.
When he prices his guitars at ​$1 comma 300
​,
his annual revenue is ​$3 comma 900
.
Part 2
Over this range of guitar​ prices, does the craftsman face​ elastic, unit-elastic, or inelastic​ demand?

Answer 1

To determine the elasticity of demand, we can calculate the price elasticity of demand using the formula:

Elasticity = (% change in quantity demanded) / (% change in price).

Let's calculate the percentage change in quantity demanded:

% change in quantity demanded = ((new quantity demanded - original quantity demanded) / original quantity demanded) * 100.

When the price is $1,400, the annual revenue is $2,800, and when the price is $1,300, the annual revenue is $3,900.

% change in quantity demanded = ((3,900 - 2,800) / 2,800) * 100 = 39.29%.

Next, let's calculate the percentage change in price:

% change in price = ((new price - original price) / original price) * 100.

% change in price = ((1,300 - 1,400) / 1,400) * 100 = -7.14%.

Now, let's calculate the price elasticity of demand:

Elasticity = (% change in quantity demanded) / (% change in price) = 39.29% / -7.14%.

The craftsman faces elastic demand as the price elasticity of demand is greater than 1.