Suppose that the quantity of lemonade demanded falls from 103 000 litres per week to 97 000 litres per week as a result of a 10% increase in its price.The price elasticity of demand for lemonade is therefore
A)1.03.
B)6.0.
C)1.97.
D)0.6.
E)impossible to compute unless we know the before and after prices.

Question

Quizplus · Accepted Answer

Price elasticity of demand (PED) measures the percentage change in quantity demanded in response to a one percent change in price. Using the midpoint formula, we get:
PED = ((Q2 - Q1)/((Q2 + Q1)/2)) / ((P2 - P1)/((P2 + P1)/2))
where Q1 = 103000, Q2 = 97000, P1 and P2 represent the before and after price, respectively.
Let's assume the before price was $1 per litre. After a 10% increase, the new price would be $1.10 per litre.
PED = ((97000-103000)/((97000+103000)/2)) / ((1.10 - 1)/((1.10+1)/2))
PED = (-6000/100000) / (0.10/1.05)
PED = -0.06 / 0.0952 
PED = -0.63
The negative sign indicates that the demand for lemonade is price inelastic. Absolute value is used to make it positive. PED is less than 1, which means a 10% increase in price leads to a less than 10% decrease in quantity demanded, showing that lemonade is price inelastic. Therefore, the answer is D) 0.6.

Suppose That the Quantity of Lemonade Demanded Falls from 103