A product's price rises from $4 to $6,causing consumption to fall from 2 million to 1 million units.The numerical value of price elasticity of demand is therefore:
A)1.50
B)1.67
C)2.00
D)3.00
E)1.00

Question

Quizplus · Accepted Answer

First, calculate the percentage change in price:
Percent change in price=(new price-old price)/old price ×100%
=(6-4)/4 ×100%
=50%
Next, calculate the percentage change in quantity:
Percent change in quantity=(new quantity-old quantity)/old quantity ×100%
=(1,000,000-2,000,000)/2,000,000 ×100%
=-50%
Using the formula for price elasticity of demand:
Price elasticity of demand=percent change in quantity/percent change in price
=-50%/50%
=-1
Since the price elasticity of demand is negative, we take the absolute value to get:
Elasticity of demand=1
Now, we can use the midpoint formula to get a more precise value:
Elasticity of demand= [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]
=[(1,000,000-2,000,000)/((1,000,000+2,000,000)/2)] / [(6-4)/((6+4)/2)]
=-1.67
Therefore, the closest value is B) 1.67.

A Product's Price Rises from $4 to $6,causing Consumption to Fall