This question also has to do with the relationship between elasticity and revenue. Here, however, our information is a little different. We know that price was reduced, resulting in increased revenue. The question then asks us to figure out what the estimate of elasticity must have been. For a reduction in price to lead to an increase in revenue, means that the quantity response had to be greater than the price change, in percentage terms. Otherwise, the reduction in price would have reduced revenue because the lower prices paid would not have been compensated for by increased sales. This means that %Q > %P So, all we need to do is look for a demand elasticity greater than 1; no other answer could be correct.

8. After paying an economist to estimate the price elasticity of demand for socks, sock manufacturers, expecting to increase revenues, decide to reduce the price of socks. The estimate of demand elasticity could have been:

1. .5 If demand were inelastic, less than 1, reducing the price would reduce revenue, so this can't be correct.
2. .25 If demand were inelastic, less than 1, reducing the price would reduce revenue, so this can't be correct.
3. .75 If demand were inelastic, less than 1, reducing the price would reduce revenue, so this can't be correct.
4. -.75 We decided to use the convention of having demand elasticity be positive. However, if we were using negative numbers instead, this would be inelastic demand, so this is wrong.
5. 1.75 Correct, as explained above.