When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
A) 1.50, and an increase in price will result in an increase in total revenue for good A.
B) 1.50, and an increase in price will result in a decrease in total revenue for good b.
C) 0.67, and an increase in price will result in an increase in total revenue for good A.
D) 0.67, and an increase in price will result in a decrease in total revenue for good A.

Question

Quizplus · Accepted Answer

Using the midpoint method formula, we have:

Price elasticity of demand = (change in quantity demanded / midpoint) / (change in price / midpoint)
Midpoint for quantity demanded = (500 + 400) / 2 = 450
Midpoint for price = ($50 + $70) / 2 = $60

Change in quantity demanded = 400 - 500 = -100
Change in price = $70 - $50 = $20

Plugging in these values, we get:

Price elasticity of demand = (-100 / 450) / (20 / 60) = -0.67

Since we take the absolute value of the answer, the price elasticity of demand is 0.67. This means that the good has inelastic demand, and an increase in price will result in a proportionately smaller decrease in quantity demanded. As a result, total revenue will increase when price is increased. Therefore, the correct choice is C.

When the Price of Good a Is $50, the Quantity