Question

This week you sold 70 units at a price of 20. Last week you sold 28 units at a price of 63. These are two points on the demand curve for the product we're selling. Over this range, what is the price elasticity of demand for this product?

(note: enter your answers as a negative number and round to 2 decimal places. Example: "-3.12")

Answer 1

Answer : Here we have to use midpoint formula to calculate the price elasticity of demand. Let, Q1 = previous week's sold output; Q2 = this week's sold output; P1 = previous week's price level; and P2 = this week's price level. For midpoint formula;

% change in quantity = [(Q2 - Q1) / {(Q2 + Q1)/2}] * 100

% change in quantity = [(70 - 28) / {(70 + 28)/2}] * 100

=> % change in quantity = [42 / 49] * 100

=> % change in quantity = 85.71

% change in price = [(P2 - P1) / {(P2 + P1)/2}] * 100

% change in price = [(20 - 63) / {(20 + 63)/2}] * 100

=> % change in price = [(- 43) / 41.5] * 100

=> % change in price = - 103.61

Price elasticity of demand = % change in quantity / % change in price

=> Price elasticity of demand = 85.71 / (- 103.61)

=>   Price elasticity of demand = - 0.83

Therefore, the price elasticity of demand between two points is - 0.83 .