Suppose that the price of eggs increases from 75 cents to $1.00 per dozen and as a result a typical farmer experiences a decrease in egg sales from 300 to 200 dozen per week. Using the method of average values, the absolute price elasticity of demand is
A) 1.4.
B) 0.8.
C) 3.0.
D) 1.75.

Question

Quizplus · Accepted Answer

The absolute price elasticity of demand is calculated using the formula: |Ed| = (ΔQ / Qavg) / (ΔP / Pavg), where ΔQ is the change in quantity demanded, Qavg is the average quantity demanded, ΔP is the change in price, and Pavg is the average price. Here, ΔQ = 200 - 300 = -100, Qavg = (200 + 300) / 2 = 250, ΔP = $1.00 - $0.75 = $0.25, and Pavg = ($1.00 + $0.75) / 2 = $0.875. Plugging these values into the formula gives |Ed| = (|-100| / 250) / ($0.25 / $0.875) = 1.4.

Suppose That the Price of Eggs Increases from 75 Cents