When a product's price increases from $9 to $11, the quantity demanded decreases from 1200 to 800. Based on this information, the price elasticity of demand (in absolute terms) is estimated to be equal to:

Question

Quizplus · Accepted Answer

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

Using the midpoint formula:

% Change in Price = (New Price - Old Price) / [(New Price + Old Price)/2] * 100%
% Change in Price = (11 - 9) / [(11 + 9)/2] * 100%
% Change in Price = 2 / 10 * 100%
% Change in Price = 20%

% Change in Quantity Demanded = (New Quantity Demanded - Old Quantity Demanded) / [(New Quantity Demanded + Old Quantity Demanded)/2] * 100%
% Change in Quantity Demanded = (800 - 1200) / [(800 + 1200)/2] * 100%
% Change in Quantity Demanded = -400 / 1000 * 100%
% Change in Quantity Demanded = -40%

Using the formula for price elasticity of demand:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Price Elasticity of Demand = -40% / 20%

Price Elasticity of Demand = -2.0 (absolute value)

Therefore, the price elasticity of demand (in absolute terms) is estimated to be 2.0.

When a Product's Price Increases from $9 to $11, the Quantity