Suppose that in a month the price of oranges increases from $.75 to $1. At the same time, the quantity of oranges demanded decreases from 100 to 80. The price elasticity of demand for oranges (calculated using the initial value formula) is
A) 0.75.
B) 0.6.
C) 0.25.
D) 20.

Question

Quizplus · Accepted Answer

Using the initial value formula, we have:

Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)

The percentage change in price is calculated as:

((new price - old price) / old price) x 100% =
(($1 - $.75) / $.75) x 100% =
33.33%

The percentage change in quantity demanded is calculated as:

((new quantity - old quantity) / old quantity) x 100% =
((-20) / 100) x 100% =
-20%

(Note that the negative sign indicates an inverse relationship between price and quantity demanded, as we would expect for a normal good.)

Putting it all together, we have:

Price elasticity of demand = (-20% / 33.33%) = -0.6

(Note that we ignore the negative sign in the calculation, as price elasticity of demand is always expressed as an absolute value.)

Therefore, the price elasticity of demand for oranges is 0.6, which corresponds to answer choice B.

Suppose That in a Month the Price of Oranges Increases