Suppose the price of apples increases from $22 to $25, and in response quantity demanded decreases...

Suppose the price of apples increases from $22 to $25, and in response quantity demanded decreases from 120 to 96. Using the mid-point formula, what is the price elasticity of demand? (Note: your answer should be correct to two decimal places; and be sure to express your answer as a positive number.)

Expert Solution

The price elasticity of demand is the responsiveness of change in quantity demanded due to a change in prices of the goods. This means that if the demand is more responsive to the change in prices, then the demand is more elastic. If the demand is less responsive to the change in prices, the demand is less elastic. It is given by the following formula (midpoint formula):

Price elasticity of demand = {[Q2-Q1] / [(Q2+Q1)/2]} / {[P2-P1] / [(P2+P1) /2]}

Where Q1 is the initial quantity, Q2 is the final quantity, P1 is the initial price and P2 is the final price.

Putting the values in the midpoint formula we get:

Price elasticity of demand = {[96-120] / [(96+120)/2]} / {[25-22] / [(25+22)/2]}

= {[-24/108] / [3/23.5]}

= {-0.22/0.13}

= -1.69

Here, we can see that price elasticity of demand is greater than 1 which shows that the demand is elastic.

(Note: Here minus sign just represents the negative relationship between quantity demanded and price of the good)

If the value of price elasticity of demand is more than 1 then it would be called elastic demand.

If the value of price elasticity of demand is less than 1 then it would be called inelastic demand.

If the value of price elasticity of demand is equal to 1 then it would be called unitary elastic demand.

Rahul Sunny answered 2 years ago

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