Final answer:
Price elasticity of demand is calculated using the midpoint formula, which compares the percentage change in quantity demanded to the percentage change in price. Without specific quantity information, we cannot complete the calculation for your scenario. Generally, a high elasticity suggests that lowering the price could increase revenue, while a low elasticity suggests that raising the price might do so.
Step-by-step explanation:
To calculate the price elasticity of demand using the midpoint formula, we need to know both the percentage change in price and the percentage change in quantity demanded. The midpoint formula is given by:
Elasticity = (Q2 - Q1) / ((Q2 + Q1) / 2) / (P2 - P1) / ((P2 + P1) / 2)
Where Q1 and Q2 are the initial and new quantities, and P1 and P2 are the initial and new prices, respectively. In this case, P1 is $1.50, P2 is $2.50, while we are not given specific quantities (Q1 and Q2), we can infer them based on price changes if we assume demand is linear.
First, we calculate the percentage changes:
Percentage change in price = (P2 - P1) / ((P2 + P1) / 2) * 100
This becomes:
((2.50 - 1.50) / ((2.50 + 1.50) / 2)) * 100 = (1 / 2) * 100 = 50%
Since we do not have specific quantities, we cannot directly calculate the percentage change in quantity. However, we need this information to use the midpoint formula for elasticity. You may need either to provide more information or look at other factors to estimate the elasticity in such cases.
In general, when advising a company about pricing, if the elasticity is high (greater than 1), a price decrease should lead to a sufficient increase in quantity sold to offset the lower price. If the elasticity is low (less than 1), an increase in price could lead to higher revenues even if fewer units are sold.