The price of a new toy increases from $5 to $7 and the quantity demanded decreases from 12,000 to 6,000 per month as a result. Based on this information, the price elasticity of demand (in absolute terms) is estimated to be equal to:
A)0.5, indicating relatively elastic demand.
B)0.5, indicating relatively inelastic demand.
C)2.0, indicating relatively elastic demand.
D)2.0, indicating relatively inelastic demand.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The percentage change in quantity demanded is ((6,000 - 12,000) / 12,000) * 100 = -50%. The percentage change in price is ((7 - 5) / 5) * 100 = 40%. The elasticity is |-50% / 40%| = 1.25, which is closer to 2.0 than 0.5, indicating relatively elastic demand.

The Price of a New Toy Increases from $5 to $7