A recent input price increase has Tammy worried about her profitability. She would like to pass on the increase to her customers, but she doesn't want to take a hit on her total revenue. Last year, when a similar situation came about, Tammy did pass the increase on with the following results:
Original Price of Product = $20 Original Quantity Demanded = 200
New Price of Product = $22 New Quantity Demanded = 70
Babsie has no reason to believe that the market or any characteristics of her customers changed since last year.
a. State the formula for elasticity using the midpoint method.
b. Calculate the elasticity using the midpoint formula.
c. Interpret the elasticity.
d. What should the recommendation be? Explain