The price of cheddar cheese increases from $2.50 per pound and is now $3.50 per pound. In response to this price change, the quantity demanded for cheddar cheese falls by 50%. What is the absolute value of the price elasticity of demand for cheddar cheese?
A)0.8
B)-0.8
C)1.25
D)-1.25

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the price increased from $2.50 to $3.50, which is a $1 increase on a base of $2.50, resulting in a 40% increase in price (1/2.5 = 0.4 or 40%). The quantity demanded decreased by 50%. The absolute value of the price elasticity of demand is |(-50%)/(40%)| = 1.25.

The Price of Cheddar Cheese Increases from $2