The initial price for an item is $5.00, and the quantity demanded is 400 units. When the price is raised to $5.25, the quantity demanded falls to 350 units. The absolute value of the point elasticity of demand is _____.
A) 2.25
B) 2.5
C) 3.5
D) 2.0
E) 1.5

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the point elasticity of demand:
E = (ΔQ/ΔP) * (P/Q)

Where:
ΔQ = change in quantity demanded = 350 - 400 = -50
ΔP = change in price = 5.25 - 5.00 = 0.25
P = average price = (5.25 + 5.00) / 2 = 5.125
Q = average quantity = (350 + 400) / 2 = 375

Plugging in these values, we get:
E = (-50/0.25) * (5.125/375) = -200 * 0.01366666667 = -2.733333333

Since we want the absolute value of E, we can take the absolute value and round to one decimal place:
|E| = 2.7

Therefore, the absolute value of the point elasticity of demand is 2.7, which is closest to choice B (2.5).

The Initial Price for an Item Is $5