Final answer:
The price elasticity of demand for Netflix is calculated using the midpoint formula. After substituting the given values, the calculation shows an elasticity of -0.6, indicating an inelastic demand for Netflix services.
Step-by-step explanation:
The price elasticity of demand for Netflix can be calculated using the mid-point formula, which is a standard method in economics to estimate the responsiveness of consumers to a change in price. In this scenario, the price of Netflix's service increases from $8 to $16, while the number of subscribers drops from 60 million to 40 million. To compute the elasticity, we'll use the following formula:
Elasticity = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
Using the mid-point formula, the percentage changes are calculated as:
Percentage Change in Quantity Demanded = ((Q2 - Q1) / ((Q1 + Q2) / 2)) × 100
Percentage Change in Price = ((P2 - P1) / ((P1 + P2) / 2)) × 100
Substitute the given values into the formula:
Percentage Change in Quantity Demanded = ((40 million - 60 million) / (60 million + 40 million) / 2) × 100 = (-20 million / 50 million) × 100 = -40%
Percentage Change in Price = (($16 - $8) / ($8 + $16) / 2) × 100 = ($8 / $12) × 100 = 66.67%
Now, we calculate the elasticity:
Elasticity = -40% / 66.67% = -0.6
The negative sign indicates that the quantity demanded moves inversely to price. A value of -0.6 means the demand for Netflix is inelastic since the magnitude is less than 1. This suggests that the percentage change in quantity demanded is less than the percentage change in price.