When the price of a box of cereal is $5,the quantity demanded is 800 boxes.When the price of a box of cereal is $7,the quantity demanded is 400 boxes.Calculate the price elasticity of demand when the price of a box of cereal is $6.
A)0.5
B)200
C)0.005
D)1.0
E)2.0

Question

Quizplus · Accepted Answer

Using the formula for price elasticity of demand:
Elasticity = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)

First, we need to calculate the percentage change in quantity demanded:
(Q2 - Q1) / Q1 * 100
= (400 - 800) / 800 * 100
= -50%

Next, we need to calculate the percentage change in price:
(P2 - P1) / P1 * 100
= (7 - 5) / 5 * 100
= 40%

Now, we can calculate the price elasticity of demand when the price is $6:
Elasticity = -50% / 40%
= -1.25

Since the absolute value of elasticity is greater than 1, we know that the demand is elastic. Therefore, a small change in price will result in a relatively large change in quantity demanded.
The closest option is E, 2.0 because the absolute value of -1.25 is equivalent to 1.25 and 2.0 is the closest to 1.25 when rounded.

When the Price of a Box of Cereal Is $5,the