Julia knows that the price elasticity of movie rentals is 3.She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately
A)150 percent.
B)100 percent.
C)75 percent.
D)33 percent.

Question

Quizplus · Accepted Answer

The formula for calculating the percentage change in quantity demanded due to a change in price based on the price elasticity of demand is:

Percentage change in quantity demanded = Price elasticity of demand x Percentage change in price

Here, the price elasticity of demand is given as 3, and the percentage change in price is an increase of $0.50 from the initial price of $2.

Substituting the values in the above formula, we get:

Percentage change in quantity demanded = 3 x [(2.50-2)/2] = 3 x (0.50/2) = 3 x 0.25 = 0.75 or 75%

Therefore, Julia can expect a 75% drop in rentals if she increases the price from $2 to $2.50.

Julia Knows That the Price Elasticity of Movie Rentals Is