Question

If the price of a good increases by 20% and the quantity demanded changes by 15%, then the price elasticity of demand is equal to

Answer 1

The price elasticity of a demand has the formula


`Price \ Elasticity= ( (D1-D2)/(D1+D2) )/( (P1-P2)/(P1+P2) )`

where D is demand and P is price. Based on the given:

D2= 1.15D1 ; P2 = 1.2P1

Upon simplifying


`Price \ Elasticity= ( (D1-1.15D1)/(D1+1.15D1) )/( (P1-1.2P1)/(P1+1.2P1) )`

Price Elasticity = 0.7674 or 76.74%

The variables D1 and P1 are cancelled out, and then you can obtain the answer.