Question

At the original price of $3.50 Jane sells 150 bottles of her special 9.5 Alkaline flavored water. At the new price of $2.00, she sells 500 bottles. Is demand elastic or inelastic? Show your calculations.

Answer 1

P1 = 3.50    Q1 = 150

P2 = 2.00        Q2 = 500

Price elasticity of demand = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

                                          = (500 - 150) / (2.00 - 3.50) * (3.50 + 2.00) / (150 + 500)

                                          = (350 / -1.50) * (5.50 / 650)

                                          = 1,925 / -975

                                          = -1.97

The asolute value of price elasticity of demand is 1.97. Since the absolute price elasticity of demand is greater than 1, therefore, demand is elastic.