If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity?
A) 2.5, so demand is inelastic
B) 0.4, so demand is inelastic
C) 0.4, so demand is elastic
D) 2.5, so demand is elastic

Question

Quizplus · Accepted Answer

The absolute value of demand elasticity is calculated by dividing the percent change in quantity demanded (75%) by the percent change in price (30%), which gives us 2.5. Since the absolute value is greater than 1, demand is elastic. Thus, consumers are sensitive to changes in price and will alter their purchasing behavior accordingly. Therefore, it would be best for the seller to adjust the price to increase revenue.

If the Price of Ice Cream Changes by 30 Percent