Bailey's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Bailey's Barber Shop?
A) 0.05
B) 0.10
C) 0.15
D) 3.0

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is (%change in quantity demanded)/(%change in price). 
Here, the price increases by 5%, leading to a decrease in quantity demanded by 15%. 
Therefore, the price elasticity of demand for Bailey's Barber Shop is: 
(15%/-5%) = -3. 
Since elasticity values are always positive, we take the absolute value of -3, which is 3. So, the elasticity of demand facing Bailey's Barber Shop is 3.

Bailey's Barber Shop Knows That a 5 Percent Increase in the Price