When the price of ulcer medication increased by $20 per 100 tablets, a drug company's revenue increased by $10 million. Its elasticity of demand coefficient (in absolute terms) must be:
A)zero.
B)greater than one.
C)less than one.
D)infinitely large.

Question

When the price of ulcer medication increased by $20 per 100 tablets, a drug company's revenue increased by $10 million. Its elasticity of demand coefficient (in absolute terms) must be:
A)​zero.
B)​greater than one.
C)​less than one.
D)​infinitely large.

Quizplus · Accepted Answer

Elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in its price. In this case, if the price of the ulcer medication increased by $20 per 100 tablets and the revenue of the drug company increased by $10 million, we know that the company sold an additional 500,000 boxes of the medication (since 500,000 boxes x $20 increase per box = $10 million increase in revenue).

To calculate the elasticity of demand coefficient (in absolute terms), we use the following formula:

Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

We know that the % change in price is +20% (since the price increased by $20 per box and the original price is not given), and the % change in quantity demanded is +5.26% (since the company sold an additional 500,000 boxes, and the original quantity sold is not given).

Therefore, the elasticity of demand coefficient (in absolute terms) is:

Elasticity of Demand = 5.26% / 20% = 0.263

Since this value is less than one, the demand for ulcer medication is considered inelastic, meaning that a change in price will result in a proportionately smaller change in quantity demanded.

When the Price of Ulcer Medication Increased by $20 Per