Blossom, Inc., sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise the price to $9, and the firm only manages to sell 460 bottles of perfume. Using the midpoint formula, the price elasticity of demand coefficient is
A)0.33 and elastic.
B)3 and elastic.
C)0.33 and inelastic.
D)3 and inelastic.

Question

Quizplus · Accepted Answer

The price elasticity of demand (PED) is calculated using the midpoint formula: PED = [(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: PED = [(460 - 500) / ((460 + 500)/2)] / [(9 - 7) / ((9 + 7)/2)] = -40/480 / 2/8 = -0.0833 / 0.25 = -0.333. Since the absolute value of PED is less than 1 (0.33), the demand is inelastic.