Final answer:
The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price, using the average values of both price and quantity. Option E.
Step-by-step explanation:
The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
Using the Midpoint Method for Elasticity, we first find the percentage change in quantity by taking the difference in quantity before and after a price change and dividing it by the average of the two quantities.
Then, we find the percentage change in price by taking the difference in price before and after the change and dividing it by the average of the two prices. The formula looks like this:
Price Elasticity of Demand = (% change in quantity demanded) / (% change in price)
= ((New Quantity - Original Quantity) / ((New Quantity + Original Quantity) / 2))
/ ((New Price - Original Price) / ((New Price + Original Price) / 2))
For example, if the price drops from $70 to $60, and the quantity demanded increases from 2,800 to 3,000, we would calculate the percentage change in quantity and the percentage change in price using their respective averages as the denominator.
So option E.