Question

When the price of hot dogs is $1.50 each, 500 hot dogs are sold every day. After lowering the price to $1.35 each, 510 hot dogs are sold every day.

At the original price, what is the price elasticity of demand for a hot dog?

Answer 1

Answer: The price elasticity of demand for hot dog is -0.2

Explanation: Price elasticity of demand is the percentage change in quantity of a goods divided by the percentage change in the price of the goods

PED = %∆Q ÷ %∆P

STEP1: CALCULATE THE PERCENTAGE CHANGE IN QUANTITY

[(510 - 500) ÷ 500 ] × 100 = 2%

STEP2: CALCULATE THE PERCENTAGE CHANGE IN PRICE

[($1.35 - $1.50) ÷ $1.50] ×100 = -10%

STEP3: CALCULATE THE PRICE ELASTICITY OF DEMAND

2% ÷ (-10%) = -0.2

The price elasticity is -0.2 which means that the demand is inelastic. Demand is elastic when percentage change in quantity is greater than percentage change in price.