Question

Studies indicate that the price elasticity of demand for beer is about 0.9. A government policy aimed at reducing beer consumption changed the price of a case of beer from $10 to $20. According to the midpoint method, the government policy should have reduced beer consumption by how much (in %)?

Answer 1

Answer:

60%

Explanation:

The question requires us to calculate the percentage change in the quantity of beer consumption as a result of the government's price increment using the midpoint method.

Using the midpoint method,

Price elasticity of demand is equivalent to;

(%change in quantity demanded)/(percentage change in price)

% change in price=[(P2 - P1)/(P2+P1)] × 200%

For this question , % change in price = [(20-10)/(20+10)] × 200℅ = 66.7%

Given that price elasticity of demand is 0.9, we have that

0.9 = ℅ change in demand/66.7%

% change in demand = 66.7% × 0.9 = 60%.

This means that a change in the price of beer from $10 to $20 will reduce the demand by 60%

Answer 2

Answer:

The government policy should have reduced beer consumption by 0.6 or 60%

Explanation:

Mid point formula calculates the ratio of mid point of change in demand and change in price to their average value. Then these changes are used in the calculations of elasticity of demand.

According to given data:

Elasticity of demand = 0.9

Midpoint of price  = (20-10) / [(20+10)/2] = 10 / 15 = 0.6667

Elasticity of Demand = Midpoint of demand / Midpoint of price

0.9 = Midpoint of demand / 0.6667

Midpoint of price = 0.9 x 0.6667 = 0.6

Change in demand is should reduce the consumption by 0.6 or 60%.