Question

Suppose that during the past year, the price of a laptop computer fell from $2,950 to $2,450. During the same time period, consumer sales increased from 430,000 to 619,000 laptops.
Calculate the elasticity of demand between these two price-quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers. (Note: For decreases in price or quantity, enter values in the Change column with a minus sign.)

Original New Average Change Percentage Change
Quantity ? ? ? ? a. 36.03%,
b. 18.02%,
c. 277.51%

Price($) ? ? ? ? a. -18.52%,
b. -540%,
c. -9.26%

Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price.
Step 2: Calculate the average quantity by adding the original quantity and the new quantity, and then dividing by two. Do the same for the average price.
Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the change in price.
Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price.
Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign.

Answer 1

Answer:

Option (a) is correct

Option (a) is correct

Price elasticity of demand = 1.95

Explanation:

Step 1:

Original quantity = 430,000

New quantity = 619,000

Original price = $2,950

New price = $2,450

Step 2:

Average quantity = (Original quantity + New quantity) ÷ 2

                             = (430,000 + 619,000) ÷ 2

                             = 524,500

Average price = (Original price + New price) ÷ 2

                        = ($2,950 + $2,450) ÷ 2

                        = $2,700

Step 3:

change in quantity = New quantity - Original quantity

                               = 619,000 - 430,000

                               = 189,000

change in price = New price - Original price

                          = $2,450 - $2,950

                          = -$500

Step 4:

Percentage change in quantity demanded:

= (change in quantity ÷ Average quantity) × 100

= (189,000 ÷ 524,500) × 100

= 36.03%

Percentage change in price:

= (change in price ÷ Average price) × 100

= (-$500 ÷ $2,700) × 100

= -18.52%

Step 5:

price elasticity of demand:

= percentage change in quantity demanded ÷ percentage change in price

= 36.03% ÷ 18.52%

= 1.95