A shift of the supply curve of DVDs raises the price of a DVD from $9.50 to $10.50 and reduces the quantity demanded from 41 million to 39 million DVDs a month. The price elasticity of demand for DVDs is
A) 0.5.
B) $2 per 2 million DVDs a month.
C) 2.0.
D) 2 million DVDs a month per dollar.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the quantity demanded decreases from 41 million to 39 million (a decrease of 2 million, which is approximately 4.88% of 41 million), and the price increases from $9.50 to $10.50 (an increase of $1, which is approximately 10.53% of $9.50). Thus, the price elasticity of demand is 4.88% / 10.53% ≈ 0.5.

A Shift of the Supply Curve of DVDs Raises the Price