Suppose the price of product X is increased from $8.00 to $10.00 and as a result, the quantity of X demanded decreases from 1500 to 1000.Using the midpoint method, the price elasticity of demand for X in the given price range is:
A)2.00
B)1.80
C)1.00
D)0.40

Question

Quizplus · Accepted Answer

Using the midpoint method, the price elasticity of demand can be calculated as follows:

% change in quantity = [(new quantity - old quantity) / ((new quantity + old quantity) / 2)] * 100%
% change in quantity = [(1000 - 1500) / ((1000 + 1500) / 2)] * 100%
% change in quantity = -25%

% change in price = [(new price - old price) / ((new price + old price) / 2)] * 100%
% change in price = [(10 - 8) / ((10 + 8) / 2)] * 100%
% change in price = 25%

Price elasticity of demand = % change in quantity / % change in price
Price elasticity of demand = (-25%)/25%
Price elasticity of demand = -1.00

Since the price elasticity of demand is negative, we know that the demand for product X is price elastic (i.e. an increase in price leads to a decrease in quantity demanded). The absolute value of the price elasticity of demand is 1.00, which means that for every 1% increase in price, there will be a 1% decrease in quantity demanded. Therefore, choice B (1.80) is not the best choice.

Suppose the Price of Product X Is Increased from $8