Suppose a rise in the price of a good from $6.50 to $7.50 leads to a decrease in the quantity demanded from 10,500 to 9,500 units. In this range of demand, the price elasticity of demand is
A)14.
B)7.
C)1,000.
D)1.
E)0.7.

Question

Quizplus · Accepted Answer

The price elasticity of demand can be calculated using the formula:

Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)

Here, the price has increased from $6.50 to $7.50, which is a percentage increase of (7.50-6.50)/6.50 * 100 = 15.38%.

The quantity demanded has decreased from 10,500 to 9,500, which is a percentage decrease of (9,500-10,500)/10,500 * 100 = -9.52%.

Using these figures in the formula, we get:

Price elasticity of demand = (-9.52%) / (15.38%) = -0.62

Since this value is negative, we take the absolute value to get:

Price elasticity of demand = 0.62

Since this value is less than 1, we can say that the demand is inelastic in this range. Therefore, the answer is E) 0.7.

Suppose a Rise in the Price of a Good from $6.50