ACCA Applied Skills · Performance Management · Pricing decisions
A product has a price elasticity of demand of 2.5 (ignoring the sign) at its current price of $40 and sales of 8,000 units. Assuming this elasticity holds, what is the expected sales volume if the price is raised by 4%?
With elasticity of 2.5, a 4% price rise reduces demand by 2.5 times 4%, which is 10%. Applying a 10% fall to 8,000 units gives expected sales of 7,200 units.
- A7,200 unitsCorrect
- B8,800 units
- C7,680 units
- D7,920 units
Explanation
Percentage fall in quantity = 2.5 x 4% = 10%. New volume = 8,000 x 0.90 = 7,200 units. 7,680 results from using 4% x 0.96 incorrectly, and 8,800 gets the direction of the change wrong.
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