Question

Suppose for a particular good that when the price rises from $15 to $25 the quantity demanded of the good falls from 70,000 units to 50,000 units. using the midpoint method the price elasticity of demand is 0.33 0.67 1.50 3.00

Answer 1

Elasticity measures the responsiveness of quantity demanded to a change in the price of a good. The mid-point method of elasticity uses average percent change in both quantity and price ,

`e=(Q2-Q1)/((Q2+Q1)/2) * ((P2+P1)/2)/(P2-P1)`

`e= (70000 - 50000)/(70000+50000/2) * (25+15/2)/(25 - 15)`

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So, the correct option is 0.67

Answer 2

The price elasticity of demand using the midpoint formula is -0.67.

The mid-point formula for calculating percentage changes is given by:

Percentage change in quantity = { ( Q₂ - Q₁) / [ (Q₁ + Q₂)/2 ] } × 100

Percentage change in quantity = {( 70000-50000) / [(50000 + 70000)/2 ]}×100

Percentage change in quantity = (20000/ 60000) × 100

Percentage change in quantity = 33.33%

Percentage change in price ={ ( P₂ - P₁) / [ (P₁ + P₂)/2 ] } × 100

Percentage change in price = {( 15-25) / [(25 + 15)/2 ]}×100

Percentage change in price = (-10/ 20) × 100

Percentage change in price = -50.00%

Price Elasticity of Demand = (% change in quantity) ÷ (% change in price)

Price Elasticity of Demand = 33.33/-50 = -0.67