When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
A)1.50, and an increase in price will result in an increase in total revenue for good A.
B)1.50, and an increase in price will result in a decrease in total revenue for good A.
C)0.67, and an increase in price will result in an increase in total revenue for good A.
D)0.67, and an increase in price will result in a decrease in total revenue for good A.

Question

Quizplus · Accepted Answer

The price elasticity of demand using the midpoint method is calculated as: [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)], where Q1 and Q2 are the initial and final quantities demanded, and P1 and P2 are the initial and final prices. Substituting the given values: [(400 - 500) / ((400 + 500)/2)] / [($70 - $50) / (($70 + $50)/2)] = -100 / 450 / 20 / 60 = -0.67. A price elasticity of demand less than 1 in absolute value (0.67) indicates that the demand is inelastic, meaning that the percentage change in quantity demanded is less than the percentage change in price. Therefore, an increase in price will result in an increase in total revenue for good A.

When the Price of Good a Is $50, the Quantity