Question

Last week, michelle spent $30 on caviar. today, michelle still spends $30 on caviar even though its price has doubled. what is michelle\'s price elasticity of demand for caviar? (use the midpoint formula for your calculation.)

Answer 1

Price elasticity of demand describes how the quantity demanded changes with a change in price. It describes how responsive demand is to price. 

The formula for elasticity is:
e = %change in Quantity ÷ % change in price
Keep in mind that this number will almost certainly be negative, since an increase in price should decrease demand. 

The problem tells us that price has doubled. This represents a 100% increase in price: Michelle still spent $30 dollars, although this $30 bought her half as much caviar since the price is twice what it was. This means her quantity demanded, or purchased, fell by 50%. 

e= -50% ÷ 100%
e = -0.5

This tells us, more generally, that a x% increase in the price reduces demand by x/2%.