When Luna Hair Salon raised its hair cut prices by 10% because of an increase in rent cost,it lost a quarter of its customers.The price elasticity of demand for its hair cut is

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is

% change in quantity demanded / % change in price

The price of haircuts increased by 10%, and as a result, Luna Hair Salon lost a quarter (25%) of its customers.

% change in quantity demanded = -25% 
% change in price = 10%

Therefore, the price elasticity of demand would be:

-25% / 10% = -2.5

The negative sign indicates an inverse relationship between price and quantity demanded. To get a positive number, we can drop the negative sign and take the absolute value.

So, the price elasticity of demand for Luna Hair Salon's haircuts is 2.5.

When Luna Hair Salon Raised Its Hair Cut Prices by 10