Page 28 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 2

Question 3

PED

A business, currently selling 9,000 units of its product per month, plans to
reduce the retail price from $3.50 to $3.22. It knows from previous experience
that the price elasticity for this product is –1.2 when calculated using the non-
average arc method. Assuming no other changes, the sales the business can
now expect will be:

A 9,603 units

B 9,864 units

C 9,996 units

D 10,107 units

PED = % change in demand/% change in price

% change in price = ($3.22 – $3.50)/$3.50 × 100 = –8%

–1.2 = % change in demand/–8

% change in demand = –1.2 × –8 = 9.6%

9,000 × 1.096 = 9,864 units, answer B

22