Answers
a.
demand elasticity = % change in demand/%change in price
% change in demand =( (6000 - 5000)/( (6000+5000)/2))*100 = 18.18%
% change in price = ( (4.5 - 7.5)/( (7.5+4.5)/2))*100 = -50%
demand elasticity = 18.18%/-50% = -0.3636
demand is inelastic as demand elasticity <1
b)
Initial actual markup =( (7.5-7)/7.5)*100 = 6.67%
Desired markup = - 1/price elasticity = -1/-0.3636 = 2.75%
c)
As the demand is inelastic because demand elasticity is <1, if the price is lowered, increase in quantity would not offset reduction in price thus resulting in less revenue
So decreasing price is not profitable for Sarah's baseball caps business
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