If the price of chocolate-covered peanuts decreases from $1.05 to $0.95 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) -0.5.
B) -1.
C) -2.
D) greater than 2 (absolute value).

Question

Quizplus · Accepted Answer

Price elasticity of demand = % change in quantity demanded / % change in price
% change in quantity demanded = (New quantity - Old quantity) / Old quantity *100
% change in price = (New price - Old price) / Old price * 100
Using the given values, we get:
% change in quantity demanded = (220-180)/180 * 100 = 22.22%
% change in price = (0.95-1.05)/1.05 * 100 = -9.52%
Price elasticity of demand = 22.22/-9.52 = -2.33
Since the price elasticity of demand is greater than 2 (in absolute value), the demand for chocolate-covered peanuts is elastic, meaning that a small change in price leads to a proportionate change in quantity demanded.

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