Question

Last week, Michelle spent $ 30 on caviar. Today, Michelle still spends $ 30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar? (Use the midpoint formula for your calculation.)

Answer 1

Elasticity of demand will be 1

Step-by-step explanation:

Let the original price = $1

So goods purchased
`=(30)/(1)=30` ( As Michelle spent $30 on caviar )

Now price is doubled so new price = $2

So good purchased
`=(30)/(2)=15`

So change in value of quantity = 30 - 15 = 15

Average value of quantity
`=(30+20)/(2)=22.5`

Ratio of change in quantity to average quantity
`=(15)/(22.5)=0.666`

Change in price = $2-$1 = $1

Average price
`=(1+2)/(2)=1.5`

So ratio of change in price to average price
`=(1)/(1.5)=0.666`

Elasticity of demand is given by =\frac{Ratio\ of\ change\ in\ quantity \ to \ average \ quantity}{ ratio \ of\ change \ in \ price \ to average \ price}=\frac{0.666}{0.666}=1