Tara buys 4 alternative rock CDs when price is $10 and only 2 when price is $14. Using the method of average values, her price elasticity of demand for alternative rock CDs is
A) 0.00
B) 0.50
C) 2.00
D) 5.00
E) 10.0

Question

Quizplus · Accepted Answer

The price elasticity of demand can be calculated using the formula: $E_d = \frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ price}$. Using the method of average values, the percentage change in quantity demanded is $\frac{2 - 4}{(2 + 4)/2} = -\frac{2}{3} = -66.67\%$, and the percentage change in price is $\frac{14 - 10}{(14 + 10)/2} = \frac{4}{12} = 33.33\%$. Thus, $E_d = \frac{-66.67\%}{33.33\%} = -2$. The negative sign indicates the direction of the change (inverse relationship), but the magnitude is 2.00, indicating that for every 1% increase in price, the quantity demanded decreases by 2%.

Tara Buys 4 Alternative Rock CDs When Price Is $10