Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.

-Referring to Table 5-1, if the shop increases the price from $2.00 to $3.00, the price elasticity of demand will (according to the mid-point method) be:
A) 1.25 and inelastic
B) 1.25 and elastic
C) 0.8 and inelastic
D) 0.8 and elastic

Question

Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.
 
-Referring to Table 5-1, if the shop increases the price from $2.00 to $3.00, the price elasticity of demand will (according to the mid-point method) be:
A) 1.25 and inelastic 
B) 1.25 and elastic 
C) 0.8 and inelastic 
D) 0.8 and elastic

Quizplus · Accepted Answer

Using the midpoint method formula: 
Elasticity = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]
Elasticity = [(95 - 105) / ((95 + 105) / 2)] / [(3 - 2) / ((2 + 3) / 2)]
Elasticity = [-10 / 100] / [1 / 2.5]
Elasticity = -0.25 / 0.4
Elasticity = -0.625
Since the elasticity value is negative, we need to take the absolute value (ignoring the minus sign) to get a positive value. 
Elasticity = 0.625
Since the elasticity value is greater than 1, the demand is considered elastic. Therefore, the best choice is B: 1.25 and elastic.

Table 5-1 Suppose a Coffee Shop Faces the Following Demand Schedule for Schedule