Question

Calculate the Price Elasticity of Demand (PED) for diamond rings if there is a price increase from $10,000 to $12,000 and quantity demanded falls from 100,000 to 90,000. Does this answer support what we have learned about elasticity (i.e. the Determinants of PED) and what we might expect for diamond rings

Answer 1

-0.578 and inelastic

Step-by-step explanation:

The computation of the price elasticity of demand using mid point formula is shown below:

= (change in quantity demanded ÷ average of quantity demanded) ÷ (percentage change in price ÷ average of price)

where,

Change in quantity demanded would be

= Q2 - Q1

= 90,000 - 100,000

= 10,000

And, average of quantity demanded is

= (90,000 + 100,000) ÷ 2

= 95,000

Change in price would be

= P2 - P1

= $12,000 - $10,000

= $2,000 0.1052 0.1818

And, average of price is

= ($10,000 + $12,000) ÷ 2

= $11,000

So, after solving this, the price is -0.578

This reflects the inelastic for diamond rings