The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60.What is the price elasticity of demand?
A) 1.0
B) 1.25
C) 40.0
D) 20.0
E) 0.80

Question

Quizplus · Accepted Answer

Price elasticity of demand (PED) = (percentage change in quantity demanded)/(percentage change in price)
Percentage change in quantity demanded = ((new quantity demanded - old quantity demanded)/old quantity demanded) x 100% = ((60-100)/100) x 100% = -40%
Percentage change in price = ((new price - old price)/old price) x 100% = ((3-2)/2) x 100% = 50%
PED = (-40%/50%) = -0.80
Since elasticity is a positive number, we take the absolute value of the result, which is 0.80. Since this value is less than 1, the demand is considered inelastic. 
Therefore, the best choice is B, which is the closest to the calculated PED value of 0.80.

The Price of a Bag of Pretzels Rises from $2