ACCA Applied Skills · Performance Management · Pricing decisions
A company sells a product at $50 per unit and sells 10,000 units a month. When it reduces the price to $47 per unit, demand rises to 10,600 units a month. What is the price elasticity of demand (ignoring the sign) over this range, using the original price and quantity as the base?
Price elasticity is the percentage change in quantity demanded divided by the percentage change in price. Quantity rises 6% (600/10,000) and price falls 6% (3/50), so elasticity is 1.00, meaning demand is unitary elastic over this range.
- A0.10
- B0.30
- C3.33Correct
- D1.00
Explanation
Percentage change in quantity = 600/10,000 = 6%. Percentage change in price = 3/50 = 6%. Wait: 3/50 = 6%, so elasticity = 6%/6% = 1.00. Correct option is therefore 1.00 only if the data give 6% and 6%. Working: 6% / 6% = 1.0, so demand is unitary elastic. The 3.33 option inverts the ratio with a wrong price base.
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