A Product Priced at $5 Has Annual Sales of 1,000

question 30

Multiple Choice

A product priced at $5 has annual sales of 1,000 units.When price is reduced to $4,quantity increases to 1,250 units.Other things unchanged,the price elasticity of demand for the product is:

• A) unitary.
• B) elastic.
• C) inelastic.
• D) zero.
• The change in quantity is (1250 - 1000)/(1250 + 1000)= 0.111 and the change in price is (4 - 5)/(4 + 5)= 0.111.Thus,elasticity is 0.111/0.111 = 1.0,which is unit elastic.

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Definitions:

Producer Surplus

The additional income producers receive when they sell a product for more than the minimum they would have been willing to sell it for.

Complementary Goods

Products or services that are typically consumed together, where a decrease in the price of one leads to an increase in demand for the other.

Producer Surplus

The difference between the amount a producer is paid for a good versus the minimum amount they would be willing to accept.

Equilibrium

A state in which market supply and demand balance each other, leading to price stability for a particular good or service.