Market demand is given as QD = 200 - 3P.Market supply is given as QS = P + 10.If price increases from $35 to $40,what is the price elasticity of demand?

Question

Quizplus · Accepted Answer

Using the midpoint formula, we have:

Price midpoint = (35 + 40)/2 = 37.5
Quantity midpoint = (QD(35) + QD(40))/2 = (200-3(35) + 200-3(40))/2 = 130

Using the formula for price elasticity of demand, we have:

%ΔQD = [(QD(40) - QD(35))/QDmidpoint]/[(ΔP/Pmidpoint)] = [(200-3(40) - (200-3(35)))/130]/[(5/37.5)] = -0.9/0.1333 ≈ -6.75

Since demand is decreasing as price increases, we take the absolute value of the elasticity:

|E| = |-6.75| ≈ 6.75

Therefore, the price elasticity of demand when the price increases from $35 to $40 is approximately 6.75. This is greater than 1, indicating that demand is relatively elastic (i.e. a small change in price leads to a relatively large change in quantity demanded). The closest answer choice is B) 1.3, which is incorrect.

Market Demand Is Given as QD = 200 - 3P