Question

Suppose that your firm can sell 90,000 units of its product at a price of $30, or it can sell 50,000 at a price of $40.

What is the elasticity of demand based on this information?

Just write your answer: E = ___

Answer 1

Demand at price of $30 is 90,000

Demand at price of $40 is 50,000

Elasticity of demand is calculated as %change in quantity demanded / %change in price

%change in quantity demanded = [(50,000 - 90,000) / 90,000] * 100 = -44.44%

%change in price = [(40 - 30) / 30] * 100 = 33.33%

Elasticity of demand = -(44.44% / 33.33%) = -1.33

We can ignore tha negative sign here because demand and price have negative relationship with each other which means elasticity of demand equals 1.33