Price sensitivity

Question

I would like to know how this question was calculated. It is not clear the solution added to this question. Thanks

How would you compare price point A and price point B in terms of price elasticity of demand? At which price point do we lose more customers in case of a marginal price increase?

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At price point A, an increase of € 1 leads to the loss of about 1 – 2% of customers. At price point B, an increase of € 1 leads to a loss of about 10% of customers, so at point B we lose more customers in case of a marginal price increase.

Answer 1

Hi there,

you will be basically looking at the quantity difference with the price point and you will calculate both A and B price elasticity (when we see already B is more elastic with a greater loss of good sold).

For each A and B add numbers to make it easy. For example initial price was $100 and initial number of goods sold was 100. Then you apply the changes and you calculate for both

Price Elasticity = (∆Q/Q) ÷ (∆P/P)

Qi = Initial quantity
Qf = Final quantity
Pi = Initial price and
Pf = Final price

I got for A elasticity 1,5 while for B 10, meaning B is highly elastic.

Lucie

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Answer 2

Hi there!

Just to add: remember that the optimal price is the one with the largest area under the curve.

That is when you take margin times volume, what gets the highest $ amount.