When the price of lipstick rises 10%, the quantity of lipstick demanded falls 5%.

(a) What is the price elasticity of demand?

(b) Is revenue to the sellers of lipstick raised or lowered by the change?

Answer a.

The formula to calculate the price elasticity of demand is as follows -

• Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Therefore,

• Price Elasticity of Demand = 5 / 10
• Price Elasticity of Demand = 0.50

.

Answer b.

• Since demand is inelastic, the increase in price will result in an increase in total revenue for lipstick sellers.

As a general rule -

• When demand is elastic, price and total revenue move in opposite directions
• When demand is inelastic, price and total revenue move in the same direction.

Therefore,

• An increase in price results in an increase in total revenue.