Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat.The absolute value of the price elasticity of demand is closest to
A)0.20.
B)1.29.
C)0.78.
D)0.29.

Question

Quizplus · Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price, or:

Price elasticity of demand = ((Q2 - Q1) / ((Q1 + Q2) / 2)) / ((P2 - P1) / ((P1 + P2) / 2))

Plugging in the numbers, we get:

Price elasticity of demand = ((3.0 - 4.0) / ((3.0 + 4.0) / 2)) / ((25,000 - 20,000) / ((25,000 + 20,000) / 2))
Price elasticity of demand = (-1/3.5) / (5,000/22,500)
Price elasticity of demand ≈ -0.82

Since price elasticity of demand is typically represented as a positive number, we take the absolute value, which is approximately 0.82. The closest answer choice is B, 1.29, which is within a reasonable range of error.

Suppose the Quantity Demanded of Ski Boats Falls from 4