A sporting goods store observes that as they reduce the price of squash balls from $5 to $4, their quantity demanded rises from 200 to 220. Rounding to the nearest tenth, they correctly compute the elasticity of demand of squash balls to be:
A) 0.1.
B) 0.4.
C) 2.3.
D) 5.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated using the formula: (percentage change in quantity demanded) / (percentage change in price). The percentage change in quantity demanded is ((220-200)/200)*100 = 10%, and the percentage change in price is ((4-5)/5)*100 = -20%. Thus, the elasticity is 10% / -20% = -0.5. However, elasticity is typically expressed as a positive number, so the correct answer is 0.5, which rounds to 0.4.

A Sporting Goods Store Observes That as They Reduce the Price