If the price of chocolate-covered peanuts decreases from $1.10 to $0.90 and the quantity demanded increases from 180 bags to 220 bags, this indicates that, if other things are unchanged, the price elasticity of demand is:
A) 0.
B) -0.5.
C) -1.
D) -2.

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. Using the midpoint method, we have:

%ΔQ = [(220-180)/((220+180)/2)]*100% = 22.22%
%ΔP = [(0.90-1.10)/((0.90+1.10)/2)]*100% = -18.18%

Therefore, the price elasticity of demand is:

|E| = %ΔQ/|%ΔP| = 22.22% / 18.18% = 1.22

Since the price elasticity of demand is greater than 1, we can conclude that the demand for chocolate-covered peanuts is elastic. More specifically, a 1% decrease in price leads to a 1.22% increase in quantity demanded. Therefore, the correct answer is C.

If the Price of Chocolate-Covered Peanuts Decreases from $1