Suppose that Johns cakes sells 200 subs per day at 18 per ca

Suppose that John\'s cakes sells 200 subs per day at $18 per cake. If the price elasticity of demand for John\'s cakes is -1.5 (Ed = -1.5) and John wants to increase his cake sales by 15% per day, then John should reduce the price of his cakes by:

1) 8.25%

2) 5%

3) 22.5%

4) 10%

5) 30%

6) 13.5%

Solution

4) 10% is the answer

ED= Change in quantity/ Change in price

-1.5= 15/p

p= -10

So he must decrease the prices by 10% to get more sales