Question

1. (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Using the midpoint formula, show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve

Answer 1

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In this scenario, the price elasticity of demand is 0.25.

Step-by-step explanation:

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price.

It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

In the given scenario, the initial price is $1 and the quantity demanded is 50 units.

After the price reduction to $0.20, the quantity demanded increases to 70 units.

Using the midpoint formula, the percentage change in quantity demanded is (70-50)/(70+50)/2 * 100 = 20%. The percentage change in price is (0.20-1)/(0.20+1)/2 * 100 = -80%.

Using the formula for price elasticity of demand, we have: elasticity = (20/(-80)) * (1/1) = -0.25.

Since price elasticities of demand are read as absolute values, we have a price elasticity of demand of 0.25.