Question

If a company increases its prices from $2 to $2.20, and its sales fall from 5 million units to 4.5 million units, using the midpoint method, what is the price elasticity of demand for this market?

a. 1
b. 1.5
c. 2
d. 0.5

Answer 1

-1.10526

Step-by-step explanation:

The computation of the price elasticity of demand is shown below:

Price elasticity of demand is

= (Change in quantity demanded ÷ average of quantity demanded) ÷ (Change in price ÷ average of price)

where,

q1 = 5

q2 = 4.5

p1 = $2

p2 = $2.2

So,

= {(4.5 - 5) ÷ (4.5 + 5) ÷ 2} ÷ {(2.2 - 2) ÷ (2.2 + 2) ÷ 2 }

= {-0.5 ÷ 4.75 } ÷ {0.2 ÷ 2.1 }

= -0.10526 ÷ 0.0952

= -1.10526