Question

suppose a local bank increases the fees they charge for their bank accounts by 25 percent. in response, the demand for their bank accounts decrease from 45,000 to 30,000. what is price elasticity of demand for this bank's accounts? using the midpoint formula, the price elasticity of demand is?

Answer 1

the bank charges increase by 25%

the midpoint method uses (change in price/average price) ........ (the price is charges)

suppose the fee is $100 initially and increases by 25% mean the new fees is $125.

Elasticity of demand=(change in quantity/average quantity)/(change in price/average price)
Change in quantity=30000-45000=-15000
average quantity=(30000+45000)/2=37500
change in price=125-100=25
average price=(125+100)/2=112.5
Elasticity of demand=(-15000/37500)/(25/112.5)

=-1.8

=1.8 (absolute value)

the price elasticity of demand is 1.8 in absolute term. it is elastic as the elastcity is above 1.