Suppose the price of local cable TV service increased from$16.20 to$19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, using the midpoint method, price elasticity of demand is approximately
A)0.83.
B)1.2.
C)1.
D)8.

Question

Quizplus · Accepted Answer

The midpoint method for calculating elasticity is given by the formula: Elasticity = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)], where Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices. Substituting the given values: [(176,000 - 224,000) / ((176,000 + 224,000)/2)] / [($19.80 - $16.20) / (($19.80 + $16.20)/2)] = [-48,000 / 200,000] / [3.6 / 18] = -0.24 / 0.2 = -1.2. The negative sign indicates the direction of the change (inverse relationship), but when we talk about the magnitude of elasticity, we refer to the absolute value, which is 1.2.

Suppose the Price of Local Cable TV Service Increased From$16