Done many elasticity problems but this one seems different, maybe I’m missing something. Admissions in the current year total 20,000. If it charges $75 per child today, and the elasticity of demand is 1.2, what price would they need to charge next year due to increase admissions by 5%? a) $78.12 b) $71.88 c) $75.00 d) $70.50
is ans A? i got $78.191
The answer is b) $71.88
But I also get a… maybe the answer is wrong.
Closest answer looks to be B. Demand is elastic and they want to inc demand by 5%. So they need to reduce price by less than 5%. To be exact, 5/1.2 = 4.2% 4.2% of 75 = 3.15. so new price should be approx 71.85. B looks to be the closest.
Elasticity =%change in demand/%change in price 1.2= 5%/x% solving for x, we get x=4.167% Hence price will decline by 4.176%. i.e 75-3.125=71.87 (answer b)
No, the answer is not wrong. Since this is an elastic demand, an increase in admission numbers would occur at a decrease of the price charged per child. That leaves you only 2 options, either B or D. 1.2=5%/percentage change in price = > percentage change in price =5%1.2 = 4.167% So, in order for the admissions to increase by 5%, the price charged has to drop by 4.167%. That means, the new admission price has to be 75*(1-4.167%) = 71.875~71.88, that’s B.
ans is B, I just made a stupid mistake…ignored the negative sign. When demand increases, price falls, so option A and C are out, ans should be B or D
got it, thanks!
nice question