At the present price of $20 per unit, the firm is selling 2000 units of a good. It believes that the price elasticity of demand for the good is - 1.0. If the price is lowered to $18, then the buyers would be expected to buy
a) 1800 units b) 2000units c) 2200 units d) 2222 units
Thanks
To determine how many units buyers would be expected to buy if the price is lowered to $18, we can use the formula for price elasticity of demand:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
In this case, the price elasticity of demand is given as -1.0, meaning a 1% decrease in price will result in a 1% increase in quantity demanded.
Let's calculate the percentage change in price first:
Percentage Change in Price = ((New Price - Old Price) / Old Price) x 100
Percentage Change in Price = (($18 - $20) / $20) x 100 = (-$2 / $20) x 100 = -10%
Now, we can use the price elasticity of demand formula again to calculate the expected percentage change in quantity demanded:
-1.0 = (% Change in Quantity Demanded) / (-10%)
Simplifying:
-1.0 = (% Change in Quantity Demanded) / -0.10
% Change in Quantity Demanded = -1.0 x -0.10 = 0.10 (or 10%)
Finally, we can calculate the expected change in quantity demanded:
Change in Quantity Demanded = (% Change in Quantity Demanded) x Old Quantity Demanded
Change in Quantity Demanded = 0.10 x 2000 = 200
So, if the price is lowered to $18, buyers would be expected to buy:
Old Quantity Demanded + Change in Quantity Demanded = 2000 + 200 = 2200 units
Therefore, the correct answer is option c) 2200 units.