Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $2.5 each, he sells 100. At a price of $2 each, he sells 300. a. What is the elasticity of demand? b. Is demand elastic or inelastic over this price range?. c. If demand had the same elasticity for a price decline from $2 to $1.5 as it does for the decline from $2.5 to $2, would cutting the price from $2 to $1.5 increase or decrease Danny's total revenue?

(a) Elasticity of demand:

Conditions:

• At a price of $2.5 each, Danny "Dimes" Donahue sells 100 homemade brownies.
• At a price of $2 each, Danny sells 300 homemade brownies.

Elasticity** = % change in quantity demanded / % change in price

= [($300 - $100) / $100] / [($2 - $2.5) / $2.5]

= ($200 / $100) / (- $0.5 / $2.5)

= $2 / (- $0.2)

= - $10.0

• Since no calculation method is specified, the point price elasticity formula is used (and not the midpoint method).

(b) Is demand elastic or inelastic?

Since the absolute value of elasticity is higher than 1, the demand is elastic.

(c) If demand had the same elasticity for a price decline, increase or decrease in Danny's total revenue:

When price falls from $2 to $1.5, elasticity = - 10.

Therefore demand is elastic. With elastic demand, a price cut will increase the total revenue.