ACCA Applied Skills · Performance Management · Pricing decisions
The demand function for a product is P = 120 - 0.02Q, where P is the price in $ and Q is the quantity. At a price of $80, what is the price elasticity of demand (ignoring the sign), using the point elasticity formula?
Rearrange the demand function to Q = 6,000 - 50P. At a price of $80 quantity is 2,000 units. Point elasticity equals the slope of 50 multiplied by P/Q, which is 80/2,000, giving elasticity of 2.0.
- A0.50
- B1.50
- C2.00Correct
- D3.00
Explanation
At P = 80: 0.02Q = 40, so Q = 2,000. Rearranging, Q = 6,000 - 50P, so dQ/dP = -50. Elasticity = 50 x (80/2,000) = 2.0. The 0.50 option inverts the ratio, and 1.50 or 3.00 come from wrong slope or quantity.
Did you get it right without looking?
One question tells you little. A timed set on Pricing decisions shows your real accuracy, how long you take and where you lose marks.
More Pricing decisions questions
- Which of the following conditions would make a market penetration pricing strategy MORE suitable for a new product?
- Marlow Ltd makes a product with a variable cost of $18 per unit. Fixed overheads are $90,000 and are absorbed on a budgeted volume of 15,000…
- A company uses full cost-plus pricing. A product has a total unit cost of $40 (including absorbed overheads) and the company adds a mark-up …
- 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 …
- A company currently sells 10,000 units at a full-cost-plus price. Budgeted fixed overheads are $120,000 and are absorbed on 10,000 units. Ac…
- 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 el…