Hi, everyone.
I really don’t understand this problem but since I am currently homeschooled and am self studying for AP exams, I don’t have anyone to help me with it. My friends are not taking the econ exams this May…!</p>
When you try to get the price elasticity of demand, as far as I understand, you do:
Price Elasticity of Demand = (%change in Q/%change in P), or (change in Q / (Q1+Q2)/2) / (change in P / (P1+P2)/2)</p>
(I hope you understand :(… It’s on p.64 of Barron’s)</p>
But there’s a problem that is having me so much confused…</p>
<ol>
<li>What percentage of decrease in quantities demanded of the owner’s services would allow her to maintain the same level of total revenue (given the increase in the price of use of a washer)?</li>
</ol>
(The price increased from $1.50 to $1.75)</p>
You clearly need the same percentage of decrease in quantities demanded as the percentage of increase in price in order to maintain the same total revenue.
And if I applied the equation for Price Elasticity of Demand, I get something like 15.38% since (0.25/1.625)x100=15.38%</p>
But the answer says </p>
“The increase in the price is 16.67 percent (.25 on a basis of $1.50).”</p>
I understand that .25/1.50 is 16.67, but why on a basis of $1.50?
Why is it solved in a different way from the basic equation above?..</p>
Pleasepleaseplease help!!</p>