Suppose that in a month the price of pizza increases from $4 to $5. At the same time, the quantity of pizzas demanded decreases from 200 to 190. The price elasticity of demand for pizza (calculated using the midpoint formula) is
A) 0.1.
B) 0.23.
C) 0.25.
D) 4.35.

Question

Quizplus · Accepted Answer

The price elasticity of demand using the midpoint formula 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: [(190 - 200) / (190 + 200)/2] / [(5 - 4) / (5 + 4)/2] = -10/195 / 1/4.5 = -0.513 / 0.222 = -2.31 (in absolute value). The correct calculation should yield an elasticity of about 0.23, indicating a relatively inelastic demand.

Suppose That in a Month the Price of Pizza Increases