One Guy's Pizza advertising expenditures are $1,200 and sales are $30,000. When the advertising expenditure increases to $1,400, pizza sales increase to $32,000. The arc advertising elasticity of demand is approximately:

Question

Quizplus · Accepted Answer

Arc elasticity of demand is given by the formula:

Arc elasticity = (Q2 - Q1) / Qavg * (Pavg / (P2 - P1))

Where,

Q1 = Initial quantity demanded = 30,000
Q2 = Final quantity demanded = 32,000
P1 = Initial price = $1,200
P2 = Final price = $1,400
Qavg = (Q1 + Q2) / 2 = (30,000 + 32,000) / 2 = 31,000
Pavg = (P1 + P2) / 2 = ($1,200 + $1,400) / 2 = $1,300

Substituting the values in the formula, we get:

Arc elasticity = (32,000 - 30,000) / 31,000 * ($1,300 / ($1,400 - $1,200))
= 2,000 / 31,000 * ($1,300 / $200)
= 0.419

Rounding off to one decimal place, the arc elasticity of demand is approximately 0.4, which is option C.

One Guy's Pizza Advertising Expenditures Are $1,200 and Sales Are