If Sam,the Pizza Man,lowers the price of his pizzas from $6 to $5 and finds that sales increase from 400 to 600 pizzas per week,then the demand for Sam's pizzas in this range is:
A)3.5.
B)0.5.
C)1.
D)2.2.
E)0.8.

Question

Quizplus · Accepted Answer

The price elasticity of demand can be calculated using the formula:

(Percentage change in quantity demanded) / (Percentage change in price)

Here, the percentage change in quantity demanded is:

[(New quantity demanded - Old quantity demanded) / Old quantity demanded] x 100
= [(600 - 400) / 400] x 100
= 50%

The percentage change in price is:

[(Old price - New price) / Old price] x 100
= [(6 - 5) / 6] x 100
= 16.67%

So, the price elasticity of demand is:

(50% / 16.67%) 
= 3

Since the price elasticity of demand is greater than 1, it indicates that the demand for Sam's pizzas in this price range is relatively elastic. This means that a decrease in price resulted in a proportionately larger increase in quantity demanded.

If Sam,the Pizza Man,lowers the Price of His Pizzas from $6