ECON MICRO (with ECON MICRO Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
ECON MICRO (with ECON MICRO Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305631946
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 5, Problem 1.1P

(Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of Si per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Using the midpoint formula, show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?

Expert Solution & Answer
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To determine

The price elasticity of demand by using a midpoint formula.

ConceptIntroduction:

Price Elasticity of Demand: It is the degree of responsiveness to change in quantity demanded due to change in price level.

Midpoint formula for measuring the elasticity of demand is given as follows:

e=ΔQΔP× [ P1+ P22Q1+ Q22 ]

Where,

ΔQ=Q2Q1

ΔP=P2P1

Explanation of Solution

We have presented the information in following table:

Price (in $) Quantity (in units)
$1 50
$0.20 70

By applying the mid-point formula, we get

e= 200.80×[ 1+ 0.20250+702 ]

On solving the above, we get,

e=0.25

Hence, elasticity of demand using midpoint formula is 0.25

Now, if the elasticity of demand remains constant along the demand curve, then a 10% rise in the price will reduce the quantity demanded. We can calculate the amount of reduction in quantity demanded in following way.

e=[ % change in quantity demanded% change in price ]

0.25=[ % change in quantity demanded10% ]

So, the quantity demanded will decrease by 2.5%

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Price Elasticity of Supply; Author: Economics Online;https://www.youtube.com/watch?v=4bDIm3j-7is;License: Standard youtube license