Suppose that the quantity of lemonade demanded falls from 103 000 litres per week to 97 000 litres per week as a result of a 10 percent increase in its price. The price elasticity of demand for lemonade is therefore
A) 6.0.
B) 1.03.
C) 0.6.
D) 1.97.
E) impossible to compute unless we know the before and after prices.

Question

Quizplus · Accepted Answer

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

Given:

Initial quantity demanded (Q1) = 103,000 litres per week
New quantity demanded (Q2) = 97,000 litres per week
Change in quantity demanded (ΔQ) = Q2 - Q1 = -6,000 litres per week
Percentage change in quantity demanded = ΔQ / Q1 x 100% = -6,000 / 103,000 x 100% = -5.83%

Price increase = 10%

Percentage change in price = 10%

Price elasticity of demand = -5.83% / 10% = -0.583

We take the absolute value of the result to obtain a positive elasticity value, so the price elasticity of demand for lemonade is 0.583, which is less than 1, making it inelastic.

To choose the best answer, we need to select the option that matches the calculated value of the price elasticity of demand. Therefore, the best choice is C) 0.6.

Suppose That the Quantity of Lemonade Demanded Falls from 103