Question

A firm increases the price of a good from £2 to £3. As a result the quantity demanded falls from 200 units to 150 units. Calculate the price elasticity of demand for that good. Enter the magnitude of the PED – the negative sign is already provided.

PED =

Answer 1

To find the price elasticity of demand, calculate the percentage changes in quantity and price, then divide the former by the latter. For the given price increase from £2 to £3 and the quantity demanded decrease from 200 units to 150 units, the magnitude of the PED is 0.71425, indicating relatively inelastic demand.

Step-by-step explanation:

To calculate the price elasticity of demand (PED) for a good when the price increases from £2 to £3 and the quantity demanded falls from 200 units to 150 units, we use the percentage change in quantity divided by the percentage change in price. The formula for PED is:

PED = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)

First, we calculate the percentage change in quantity:

((150 - 200) / ((150 + 200) / 2)) x 100 = (-50 / 175) x 100 = -28.57%

Then, we calculate the percentage change in price:

((3 - 2) / ((3 + 2) / 2)) x 100 = (1 / 2.5) x 100 = 40%

Finally, we divide the percentage change in quantity by the percentage change in price:

PED = (-28.57% / 40%) = -0.71425

The magnitude of the PED is 0.71425, which means that for this good, the quantity demanded is relatively inelastic with respect to its price change from £2 to £3.