The price of a firm's product increases from $2.30 to $2.60. As a result, the firm's total revenue decreases from $460,000 to $208,000. The arc price elasticity of demand for the good is equal to
A) -70.
B) -7.
C) -0.7.
D) 0.

Question

Quizplus · Accepted Answer

The arc price elasticity of demand is calculated using the formula: $E_d = \frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ price}$. First, calculate the percentage changes: Price increases from $2.30 to $2.60, a change of $0.30 on an original price of $2.30, which is a 13.04% increase ($\frac{0.30}{2.30} \times 100$). Revenue decreases from $460,000 to $208,000, a change of $252,000 on an original revenue of $460,000, which is a 54.78% decrease ($\frac{252,000}{460,000} \times 100$). Assuming the price increase is the sole reason for the revenue decrease, this change in revenue reflects a change in quantity demanded. Thus, $E_d = \frac{-54.78}{13.04} \approx -4.2$. However, none of the provided options match this calculation, suggesting a mistake in the calculation process or a misunderstanding of the question's requirements. Given the options, the correct approach to calculating elasticity might involve a different interpretation or method, but based on standard elasticity calculation methods, the provided answer choices do not align with the typical calculation outcome.

The Price of a Firm's Product Increases from $2