Suppose that Lance purchases one pizza per month when the price is $19 and three pizzas per month when the price is $15. What is the price elasticity of Lance's demand curve?
A) 0.235
B) 2.00
C) 4.25
D) 6.33

Question

Quizplus · Accepted Answer

We can use the midpoint formula to calculate the price elasticity of demand:

Elasticity = [(Q2 - Q1)/((Q1 + Q2)/2)] / [(P2 - P1)/((P1 + P2)/2)]

Let's say that Lance's initial quantity demanded (when the price is $19) is Q1 = 1 pizza per month and the initial price is P1 = $19. When the price drops to $15, his quantity demanded increases to Q2 = 3 pizzas per month and the new price is P2 = $15.

Elasticity = [(3 - 1)/((3+1)/2)] / [($15 - $19)/(($15+$19)/2)] = [2/2] / [-$4/($34/2)] ≈ 4.24

Therefore, the price elasticity of Lance's demand curve is approximately 4.25, which means his demand is relatively elastic. A 1% decrease in price would lead to a greater than 1% increase in quantity demanded.

Suppose That Lance Purchases One Pizza Per Month When the Price