Suppose Mikes Hot Dogs sells 500 hot dogs a day at 2 a piece

Suppose Mike\'s Hot Dogs sells 500 hot dogs a day at $2 a piece. If the price elasticity of demand for Mike\'s Hot Dogs is -0.5 (Ed = -0.5) and Mike increases the price of a hot dog by 10%, then Mike will sell approximately how many less hot dogs?

1) 5

2) 50

3) 25

4) 10

5) 15

6) 100

7) 20

Solution

Original Q = 500 hot dogs and original Price = $2.

New Price = Original price + 10% of original price = 2 + 0.2 = $2.2

Ed = 0.5

and we know that Ed = Change in Q/change in P * Original P/original Q   

-0.5 = Change in Q/0.2 * 2/500

Change in Q = 25

Now Mike will sell 25 less hot dogs.