Blossom, Inc., sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise the price to $9, and the firm only manages to sell 460 bottles of perfume. Using the midpoint formula, the price elasticity of demand coefficient is
A) 0.33 and elastic.
B) 3.0 and elastic.
C) 0.33 and inelastic.
D) 3.0 and inelastic.

Question

Quizplus · Accepted Answer

Using the midpoint formula:
Price elasticity of demand = [(Q2-Q1)/((Q1+Q2)/2)]/[(P2-P1)/((P1+P2)/2)]
= [(460-500)/((460+500)/2)]/[(9-7)/((9+7)/2)]
= [-40/480]/[2/8]
= [-0.08333]/[0.25]
= -0.3333

The absolute value of the coefficient is less than 1, which indicates that the demand for Blossom's perfume is inelastic. Therefore, the best choice is C) 0.33 and inelastic.