Question

In: Economics

1. Lyft cuts the price of a ride in New York City by 20%. Thereafter, the...

1. Lyft cuts the price of a ride in New York City by 20%. Thereafter, the quantity of rides demanded rises by 25%. What is the absolute value of the price elasticity of demand for Lyft rides?

a. 0.8
b. –0.8 c. 1.25 d. –1.25

Solutions

Expert Solution

There exists an inverse relationship between price of a good and its quantity demanded.

Due to this inverse or negative relationship between price and quantity demanded, the value of the price elasticity of demand is always denoted with a negative sign.

However, the value of the price elasticity of demand can be written without the negative sign as well. This is referred to as the absolute value of the price elasticity of demand.

For instance, if the value of price elasticity of demand is -1.75. The absolute value of the price elasticity of demand would be 1.75 (we just have to remove the negative sign to get the absolute value).

It has been stated that when Lyft cuts the price of ride by 20%, the quantity of rides demanded rises by 25%.

So,

Percenatge change in price = -20%

Percentage change in quantity demanded = 25%

Calculate the price elasticity of demand -

Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price

Price elasticity of demand = 25/(-20) = -1.25

The price elasticity of demand is -1.25

As stated above, the absolute value of price elasticity of demand is written without the negative sign.

Thus,

The absolute value of the price elasticity of demand for Lyft rides is 1.25

Hence, the correct answer is the option (c).

Rahul Sunny answered 2 years ago
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