Question

Suppose the price of Twinkies is reduced from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is

Answer 1

Answer:

The price elasticity of demand for Twinkies in the given price range is 0.641.

Explanation:

The price of Twinkies is reduced from $1.45 to $1.25.

The quantity of Twinkies demanded increases from 2,000 to 2,200.

Price elasticity of demand for Twinkies

= $\frac{\frac{Q2 - Q1}{\frac{Q2 + Q1}{2} } }{\frac{P2 - P1}{\frac{P2 + P1}{2} } }$

= $\frac{\frac{2,200 - 2,000}{\frac{2,200 + 2,000}{2} } }{\frac{\ 1.25 - \ 1.45}{\frac{\ 1.25 + \ 1.45}{2} } }$

= $\frac{\frac{200}{\frac{4,200}{2} } }{\frac{\ 0.20}{\frac{\ 2.70}{2} } }$

= $\frac{\frac{200}{2100} }{\frac{\ 0.20 }{\ 1.35} }$

= $\frac{0.095}{0.148}$

= 0.641

Answer 2

Answer:

The ped is 0.64 (rounded to 2 decimal places)

Explanation:

Elasticity  is the responsiveness of quantity demanded or sold with respect to price holding all other factors constant

Price elasticity of demand (Ped)  is the change in quantity demanded in a given  market as a result of changes in pricing of goods or services offered in that market.

Ped = percentage change in quantity demanded/ percentage change in price  

The mid-point method is carried out in three steps:

1. Compute the average price and quantity given the changes in prices and quantity. In this case, average price is 1.35 ((1.45 +1.35)/2) and average quantity is 2100 ((2200 +2000)/2)
2. Calculate the percentage change in both price and quantity. Using the price average as the denominator. the percentage change in price is 14.815  ((1.25-1.45)/1.35) and the percentage change in quantity is 9.524 ((2200-2000)/2100)
3. Compute the Ped: 9.524/14.815 = 0.643

Note: the price elasticity of demand has no units