Question

Use the midpoint method when applicable to calculate the price elasticity of demand. 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. Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5. 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.

Answer 1

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.

PED = (15,000 - 20,000)/[(20,000 + 15,000)/2] / (4 - 3)/[(4 + 3)/2]

PED = -0.2857 / 0.2857 = -1 or |1| in absolute terms

PED is unitary elastic, since a 1% increase in price will result in a 1% decrease in quantity demanded.

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.

PED midpoint method = (61,000 - 70,000)/[(61,000 + 70,000)/2] / (2.21 - 2)/[(2.21 + 2)/2]

PED midpoint method = -0.1374 / 0.0998 = -1.38 or |1.38| in absolute terms

PED is elastic, since a 1% increase in price will result in a larger decrease in quantity demanded.

Step-by-step explanation:

PED midpoint method = (Q2 - Q1)/[(Q2 + Q1)/2] / (P2 - P1)/[(P2 + P1)/2]