Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is
A) 0.8.
B) 1.2.
C) 1.6.
D) 8.0.

Question

Quizplus · Accepted Answer

Price elasticity of demand is calculated using the formula: (percentage change in quantity demanded) / (percentage change in price). The percentage change in quantity demanded is ((176,000 - 224,000) / 224,000) * 100 = -21.43%. The percentage change in price is ((19.80 - 16.20) / 16.20) * 100 = 22.22%. Thus, the price elasticity of demand is |-21.43% / 22.22%| = 0.964, which is closest to 1.2 when rounded to one decimal place.

Suppose the Price of Local Cable TV Service Increased from $16.20