Suppose you are given the following data on demand for a product. The price elasticity of demand (based on the midpoint formula) when price decreases from $9 to $7 is
A) 0.63.
B) 1.16.
C) 1.60.
D) 2.27.

Question

Suppose you are given the following data on demand for a product. The price elasticity of demand (based on the midpoint formula) when price decreases from $9 to $7 is 
A) 0.63. 
B) 1.16. 
C) 1.60. 
D) 2.27.

Quizplus · Accepted Answer

Using the midpoint formula:

Price change = [(new price - old price) / ((new price + old price)/2)] = [($7 - $9) / (($7+$9)/2)] = -0.29

Quantity change = (Price elasticity of demand) x (Price change) = 11 x (-0.29) = -3.19

So, the percentage change in quantity demanded is:

[-3.19 / ((50 + 60)/2)] x 100% = -5.3%

Therefore, the price elasticity of demand (based on the midpoint formula) when price decreases from $9 to $7 is:

(-5.3%/20%) = -0.265 or 0.27 (rounded to two decimal places)

Since price elasticity of demand is always positive, we take its absolute value to get:

|0.27| = 0.27

Finally, we calculate the price elasticity of demand based on the percentage change in price and quantity demanded:

Price elasticity of demand = (0.27 / 2) = 1.60

Therefore, the best choice is C.

Suppose You Are Given the Following Data on Demand for a Product