Market demand is given as QD = 120 - P.Market supply is given as QS = 4P.If price increases from $60 to $65,what is the price elasticity of demand?

Question

Quizplus · Accepted Answer

The initial price is $60, so the initial quantity demanded is QD = 120 - 60 = 60. 
The initial quantity supplied is QS = 4(60) = 240. 
At the initial price of $60, there is excess supply of 240 - 60 = 180. This excess supply will put downward pressure on the price. 
The new equilibrium price is found by setting QD = QS: 
120 - P = 4P 
Solving for P gives P = $40. 
So the new quantity demanded is QD = 120 - 65 = 55. 
The percentage change in price is (65-60)/60 = 0.083. 
The percentage change in quantity demanded is (55-60)/60 = -0.083. 
Using the midpoint formula, the price elasticity of demand is:
|-0.083 / [(1/2)(60+65)/2]| = 1.1. 
Therefore, the answer is C) 1.1.

Market Demand Is Given as QD = 120 - P