Question

The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in the town of Crystal Lake according to the average income of the tourists visiting.

Price of T-shirt	Quantity of T-shirts demanded when average tourist income is $20,000	Quantity of T-shirts demanded when average tourist income is $30,000
$4	3,000	5,000
5	2,400	4,200
6	1,600	3,000
7	800	1,80

(A) Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt rises from $5 to $6 and the average tourist income is $20,000.

(B) Also calculate it when the average tourist income is $30,000.

(C) Is there a difference? Why? Why not?

Answer 1

A) As per mid point method, price elasticity is calculated on the basis of average.

For $20,000  average decrease of quantity demanded is (2400+1600)/2=2000, % change= 2400-1600=800, now change is divided by the average:( 800/2000)*100= 40%

Average rise in price= (5+6)/2=5.5 change= (6-5)/5.5= 0.18*100=18%

Price elasticity= 40/18= 2.22

B) For $30000 average quantity demanded= (4200+3000)/2= 3600

Change= (1200/3600)*100=33.33%

Average price same as above in point A= 18%

Price elasticity= 33.33/18= 1.85

C) Price elasticity falls as average income increases from $20,000 to $30,000 by (2.22-1.85)= 0.37. There is a difference because income is rising. So different income groups have different choise of preferences to demand a certain quantity of product.