The quantity of pencils sold is 1000 at the unit price $0.5. Suppose the price elasticity of demand for pencils by the initial value method (also known as the simple elasticity formula) is 2, and you would like to increase the quantity sold to 1200. Then the new price for pencils must be

$0.45

Explanation:

Given the following :

At a unit price of $0.5 :

Quantity sold = 1000 and price elasticity of demand = 2. If quantity sold is to increase to 1200, new price of pencils equals ;

Price elasticity of demand :

(% change in quantity demanded / percentage change in price)

% change in quantity demanded equals :

[(1200 - 1000) / 1000] * 100

(200/1000) * 100

0.2 * 100 = 20%

Therefore ;

Price elasticity of demand :

(% change in quantity demanded / percentage change in price)

(2 = 20% / % change in price)

% Change in price * 2 = 20%

% change in price = 20% / 2

% change in price = 10%

Old price = $0.5

Since quantity demanded increases, then the price of pencil has decreased

10% decrease in old price

10% of $0.5

(10/100) * $0.5

0.1 * 0.5 = $0.05

New price = $0.5 - $0.05

New price = $0.45

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