Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents.Sales consequently increased from 1,000 cones per week to 1,050.The approximate price elasticity is
A)0.20.
B)0.46.
C)2.16.
D)5.00.

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is:

% Change in Quantity Demanded / % Change in Price

We know that the price has been reduced by 10% (from $1 to 90 cents), and the quantity demanded has increased by 5% (from 1,000 to 1,050 cones per week).

% Change in Quantity Demanded = [(1,050 – 1,000) / 1,000] x 100% = 5%
% Change in Price = [(0.90 – 1) / 1] x 100% = -10%

Using the formula, we get:

% Change in Quantity Demanded / % Change in Price = 5% / -10% = -0.5

Since the price elasticity of demand is always a positive number, we take the absolute value of -0.5 to get:

Price Elasticity of Demand = 0.5

Therefore, the best choice is B, as it is the closest answer to 0.5.

Big Alice Ice Cream Parlor Reduced Its Price of an Ice