Question

Use the midpoint method when applicable to calculate the price elasticity of demand.

a. Contain Yourself!, a plastic container company, raises the price of its signature Lunchbox container from $3.00 to $4.00 . As a result, the quantity sold drops from 20,000 to 15,000.
b. Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5.
c. Capital Metro decides to increase bus fare rates from $2.00 to $2.21. Consequently, the number of passengers who decide to take the bus in Austin drops from an average of 70,000 riders a day to an average of 61,000 riders a day.

1. Elastic
2. Perfectly elastic
3. Perfectly inelastic
4. Unit elastic
5. Inelastic

Answer 1

Follows are the solution to the given points:

Step-by-step explanation:

In point a:

This business of plastic containers is increasing its Lunchbox Product Signature price around $3.00 and $4.00. The volumes produced consequently declined around 20,000 to 15,000.

`\text{Price elasticity} = ((15000-20000)/(((15000+20000)/(2))))/((4-3)/((4+(3)/(2))))`

`=((-5000)/(((35000)/(2))))/((1)/(((7)/(2))))\\\\=((-5000)/(17500))/((1)/(3.6))\\\\=((-50)/(175))/((1)/(3.6))\\\\= (-0.2857)/(0.2857) \\\\ =-1`

The price elasticity also becomes unitary

In point b:

U.S. economic theory states that the elasticity of fuel demand is 0.5 because prices would be less than 1 and so are non-elastic.

In point c:

The capital Metro agrees and add $2.00 to $2.21 also for bus fares. Consequently, with an average of 70,000 drivers a days to both a daily average 61,000 drivers, its passenger numbers who take the bus in Austin falls.

`\text{Price elasticity} = ((61000-70000)/((61000+ (70000)/(2))))/( (2.21-2)/((2.21+(2)/(2))))`

`= ((-9000)/((61000+ 35000)))/( (0.21)/((2.21+1))) \\\\= ((-9000)/((96000)))/( (0.21)/((3.21))) \\\\= ((-9)/((96)))/( (0.21)/((3.21))) \\\\= (-0.1374)/(0.099) \\\\ = -1.38`

The value being higher than 1 is elastic.