Market demand is given as QD = 250 - 0.5P.Market supply is given as QS = 2P.If price increases from $300 to $304,what is the price elasticity of demand?

Question

Quizplus · Accepted Answer

To calculate the price elasticity of demand, we need to use the following formula:

Price Elasticity of Demand = Percentage change in quantity demanded / Percentage change in price

First, we need to calculate the percentage change in price:

Percentage change in price = (New price - Old price) / Old price x 100%
Percentage change in price = ($304 - $300) / $300 x 100% = 1.33%

Next, we need to calculate the percentage change in quantity demanded:

QD at old price = 250 - 0.5($300) = 100
QD at new price = 250 - 0.5($304) = 98

Percentage change in quantity demanded = (New quantity demanded - Old quantity demanded) / Old quantity demanded x 100%
Percentage change in quantity demanded = (98 - 100) / 100 x 100% = -2%

Now we can plug in the values to the formula:

Price Elasticity of Demand = Percentage change in quantity demanded / Percentage change in price
Price Elasticity of Demand = (-2% / 1.33%) = -1.50

Since the price elasticity of demand is negative, we need to take the absolute value to get the magnitude:

Price Elasticity of Demand = |-1.50| = 1.50

Therefore, the answer is C, 1.5.

Market Demand Is Given as QD = 250 - 0