Question

Consider the following demand schedule: Price Quantity Demanded $25 20 $20 40 $15 60 $10 80 What is the price elasticity of demand between (using the arc formula) a) Price $25-$20 a) Price $20-$15 a) Price $15-$10

Answer 1

Answer:

3.05

1.38

0.725

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Arc elasticity of demand = midpoint change in quantity demanded / midpoint change in price  

Midpoint change in quantity demanded = change in quantity demanded / average of both demands

Price $25-$20

change in quantity demanded  = 40 - 20 = 20

average of both demands = (40 + 20) /2 = 30

Midpoint change in quantity demanded = 20/30 = 0.67

midpoint change in price = change in price / average of both price

change in price = $25 - $20 = $5

average of both price = ($25 + $20) / 2 = 22.5

Price $20-$15

change in quantity demanded  = 60 - 40 = 20

average of both demands = (60 + 40) /2 = 50

Midpoint change in quantity demanded = 20/50 = 0.4

midpoint change in price = change in price / average of both price

change in price = $20 - $15 = $5

average of both price = ($15 + $20) / 2 = 17.5

midpoint change in price = 5 / 17.5 = 0.29

0.4/0.29 = 1.38

Price elasticity of demand = 0.67 / 0.22 = 3.05

change in quantity demanded  = 80 - 60 = 20

average of both demands = (80 + 60) /2 = 70

Midpoint change in quantity demanded = 20/70 = 0.29

midpoint change in price = change in price / average of both price

change in price = $15 - $10 = $5

average of both price = ($15 + $10) / 2 = 12.5

5/12.5 = 0.4