Price elasticity of demand — practice questions

ΔP = +25%, ΔQ = −20%

PED = (−20%)/(+25%) = −0.8 (inelastic)

TR before = £800; after = £800 — unchanged direction confirms inelastic range near unit.

Step 1: Calculate the percentage change in price. %ΔP = [(New Price - Old Price) / Old Price] × 100 %ΔP = [($12 -$15) / $15] \times 100 = -20\%$

Step 2: Calculate the percentage change in quantity demanded. %ΔQd = [(New Qd - Old Qd) / Old Qd] × 100 %ΔQd = [(120 - 80) / 80] × 100 = +50%

Step 3: Calculate PED. PED = %ΔQd / %ΔP = 50% / -20% = -2.5

Step 4: Interpret the result and advise. The absolute value of PED is 2.5, which is greater than 1, so demand is price elastic. The price reduction was a good decision. Total revenue before was $15 \times 80 =$1200. Total revenue after is $12 \times 120 =$1440. The price cut led to a $240 increase in revenue because the percentage increase in quantity demanded was much larger than the percentage decrease in price.