If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of hula hoops purchased, the price elasticity of demand is
A) 5 and the demand for hula hoops is elastic.
B) 0.2 and the demand for hula hoops is elastic.
C) 5 and the demand for hula hoops is inelastic.
D) 0.2 and the demand for hula hoops is inelastic.

Question

Quizplus · Accepted Answer

Price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Using the midpoint method, we can calculate the percentage change in quantity demanded as (-10%)/((100+90)/2) = -11.11%. The percentage change in price is 50%. Therefore, the price elasticity of demand is (-11.11%)/(50%) = -0.222, which is less than 1. This means the demand for hula hoops is inelastic. The correct answer is D.

If a 50 Percent Increase in the Price of Hula