The current equilibrium price and quantity in the market for walnuts are $5 per pound with 10,000 pounds supplied. Supermarkets are expecting to see sales rise to 15,000 pounds due to an unusually large crop of walnuts. If the price elasticity of demand is 1.8, what is the new price per pound of walnuts?
A) $7
B) $5
C) $6
D) $4

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is: % Change in Quantity Demanded / % Change in Price. Given the elasticity is 1.8 and the quantity demanded increases from 10,000 to 15,000 pounds (a 50% increase), we solve for the % Change in Price. Rearranging the formula: % Change in Price = % Change in Quantity Demanded / Elasticity = 50% / 1.8 = 27.78% decrease in price. A 27.78% decrease from the original price of $5 leads to a new price of approximately $4 per pound.

The Current Equilibrium Price and Quantity in the Market for Walnuts