The Teenager Company makes and sells skateboards at an avera

The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about -2.5. What would total annual revenue be at the proposed price of $63?

Solution

P₁ = $70   and Q₁ = 4000

P₂ = $63    and Q₂ = ?

E_P = -2.5

Here, Price is changed by 10% (i.e. 70 -7 = 63)

The formula is

E_P = % change in Quantity Demanded / % change in price

2.5 = % change in Quantity Demanded / 10

% change in Quantity Demanded = 25%

So, Q₂ = 4000 + 100 = 4100                           (Note: 25 % of 4000 = 100)

Therefore, the Total revenue at price $63 = P₂ x Q₂ = $63 x 4100 = $258,300