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Macroeconomics II –The market system

Question 4

PED and revenue

Suppose a product is currently priced at $150 with associated demand of
30,000 units per annum. The directors would like to boost revenue and are
considering a price cut to $145. Research suggests that the PED is –0.9 (as
calculated using the non-average arc method).

Determine the expected change in demand and total revenue.

Suggested % change in price = ($145 – $150)/$150 × 100 = –3.33%

Given a PED of –0.9 the expected change in demand will be –3.33% × –0.9 =
+3%

Demand will rise to 30,000 × 1.03 = 30,900 units

Current revenue = 30,000 × $150 = $4,500,000

Predicted revenue = 30,900 × $145 = $4,480,500

Revenue has fallen by $19,500.

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