Scenario: When the price of wine is $10 per bottle, Thomas purchases 30 bottles of wine per month. Suppose the government levies a 50 percent tax on all alcoholic beverages . The burden of this tax is to be completely borne by the consumers. This reduces Thomas's consumption to 20 bottles of wine per month.
-Refer to the scenario above.Thomas's arc elasticity of demand for wine is ________.
A) −0.33
B) −0.67
C) −0.25
D) −1

Question

Quizplus · Accepted Answer

Arc elasticity of demand is calculated using the formula: [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)]. Here, Q1 = 30, Q2 = 20, P1 = $10, and P2 = $15 (due to 50% tax). Plugging in these values gives an elasticity of -1.

Scenario: When the Price of Wine Is $10 Per Bottle