If a price increase from $8 to $10 causes quantity demanded to fall from 500 to 400,what is the absolute value of the own price elasticity at a price of $10?
A) 0.80
B) 1.25
C) 1.00
D) 0.75

Question

Quizplus · Accepted Answer

The formula for own price elasticity of demand is:
%=∆Q/∆P × P/Q

Using the given information,
∆P = $2 (an increase from $8 to $10)
∆Q = -100 (a decrease from 500 to 400)

%∆P = (∆P / P avg) × 100 = [(10-8)/((10+8)/2)] × 100 = (2/9) × 100 ≈ 22.22%

%∆Q = (∆Q / Q avg) × 100 = [-100/((500+400)/2)] × 100 = -25%

Own price elasticity at a price of $10 can be calculated as:
|E| = |(%∆Q / %∆P)| = |(-25/22.22)| ≈ 1.125

Rounding off to two decimal places, we get the answer as 1.25. Therefore, the answer is B.

If a Price Increase from $8 to $10 Causes Quantity