Question

the demand curve suggests that an auto manufacturer will sell 20,000 mercedes-benz m-class vehicles when they are priced at $50,800, but when the price is reduced to $45,000, that quantity will increase to 27,000 units. what is the resulting elasticity? price elasticity

Answer 1

The price elasticity of demand can be calculated using the following formula:

E = (% change in quantity demanded)/(% change in price)

First, let's calculate the percentage change in quantity demanded:

% change in quantity demanded = ((new quantity - old quantity) / old quantity) x 100

% change in quantity demanded = ((27,000 - 20,000) / 20,000) x 100

% change in quantity demanded = 35%

Next, let's calculate the percentage change in price:

% change in price = ((new price - old price) / old price) x 100

% change in price = ((45,000 - 50,800) / 50,800) x 100

% change in price = -10.16%

Using these values, we can calculate the price elasticity of demand:

E = (% change in quantity demanded)/(% change in price)

E = 35% / -10.16%

E = -3.44

Since the elasticity is greater than 1, we can conclude that the demand for Mercedes-Benz M-Class vehicles is price elastic, meaning that a decrease in price leads to a proportionally larger increase in quantity demanded.