Question

suppose the local bank increases the fees they charge for their bank accounts by 25 percent. In response the deamnd for their bank accounts decreases from 35000 to 30000. What is price elasticity of demand for this bank's account?

Answer 1

The price elasticity of demand is calculated by finding the percentage changes in quantity demanded and price, then dividing the former by the latter. The demand for the bank's accounts has an elasticity of -0.6152, which indicates an inelastic demand.

Step-by-step explanation:

The question at hand is focused on calculating the price elasticity of demand for a bank's accounts after the local bank increases its fees by 25 percent, resulting in a decrease in demand from 35,000 accounts to 30,000 accounts. The price elasticity of demand can be calculated by using the formula which divides the percentage change in quantity demanded by the percentage change in price. In this scenario, the percentage change in quantity demanded is:

((30,000 - 35,000) / (30,000 + 35,000)/2) x 100 = (-5,000 / 32,500) x 100 = -15.38%

The percentage change in price is +25 percent, as given in the question. Now, the price elasticity of demand is:

(-15.38% / +25%) = -0.6152

Since the value of elasticity is negative due to the law of demand (price and quantity demanded move in opposite directions), we often look at the absolute value. The absolute value of the elasticity is 0.6152, which suggests that the demand for the bank's accounts is inelastic, meaning that the quantity demanded is not very sensitive to changes in the price fees.