Question

IN a local market, the monthly price of internet access service decreases from $30 to $20 and the total quantity of monthly accounts across all internet access providers increases from 150,000 to 250,000. What is the value price elasticity of demand, expressed as a positive number? (Round your answer to two decimal places)

Answer 1

Price elasticity of demand measures the change in quantity demanded due to the change in price.

Given, Old Price (P0) = $30, New Price (P1) = $20, Old Quantity (Q0) = 150,000 , New Quantity (Q1) = 2,50,000

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

% change in quantity demanded = (Q1 -Q0 ) *100 / Q0 = (2,50,000 - 1,50,000) * 100 / 1,50,000 = (1,00,000 * 100) / 1,50,000

% change in quantity demanded = 66.67%

% change in price = (P1- P0) * 100 / P0 = (20-30) * 100 / 30 = 33.33%

% change in price = 33.33%

Price elasticity of demand = 66.67 / 33.33 = 2

Price elasticity of demand = 2

So, the value of price elasticity of demand is 2, that means for a 1% fall in price of good, demand will increase by 2%.