Here are the essential concepts you must grasp in order to answer the question correctly.
Demand Function
A demand function expresses the relationship between the price of a good and the quantity demanded by consumers. In this case, D(p) = 40 - 2p indicates that as the price (p) increases, the quantity of DVDs sold (D) decreases. Understanding this function is crucial for analyzing how price changes affect consumer behavior.
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Elasticity of Demand
Elasticity of demand measures how responsive the quantity demanded is to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. This concept helps determine whether demand is elastic (sensitive to price changes) or inelastic (less sensitive), which is essential for pricing strategies.
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Calculating Elasticity
To find the elasticity function for the given demand function, we use the formula E(p) = (D'(p) * p) / D(p), where D'(p) is the derivative of the demand function with respect to price. This calculation provides a function that indicates how elasticity varies with price, allowing the store owner to make informed decisions about pricing and inventory.
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