Market demand is given as QD = 300 - 6P.Market supply is given as QS = 4P.If price increases from $25 to $30,what is the price elasticity of demand?

Question

Quizplus · Accepted Answer

We can start by finding the quantity demanded and quantity supplied at both prices:

At P = $25:
QD = 300 - 6P = 300 - 6($25) = 1500
QS = 4P = 4($25) = 100

At P = $30:
QD = 300 - 6P = 300 - 6($30) = 1200
QS = 4P = 4($30) = 120

The change in price is ($30 - $25) = $5.

The percentage change in quantity demanded is [(1200-1500)/1500] x 100% = -20%.

Using the midpoint formula, the price elasticity of demand is:
[(QD2 - QD1) / ((QD2 + QD1)/2)] / [(P2 - P1) / ((P2 + P1)/2)]

Substituting the values:
E = [(-20%)/((1200 + 1500)/2)] / [($5 / ($30 + $25)/2)]
E = -0.8 / 0.381 = -2.1

The absolute value of price elasticity of demand is 2.1, which is greater than 1. This indicates that demand is price elastic in this price range.

Since none of the options available represent the negative sign on elasticity, we take the absolute value and choose the option closest to 2.1, which is D, 1.2.

Market Demand Is Given as QD = 300 - 6P