Question

Suppose that market demand for a good is given by Q = 3 - 0.1 P where Q is the quantity of the good in units, and P is the price of the good in $ per unit. Suppose that current price is $ 1.0 /unit. Using the mid point formula, calculate the price elasticity of demand associated with the price increase by 28 % (Round your answer to two decimal points)

Answer 1

given

Q=3-0.1P and P=$1

Q=3-0.1*1

=2.9

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the price increases by 28% =old price *(1+increase rate)

=1*(1.28)

=$.28

the new quantity is

Q=3-0.1*1.28

Q=2.872

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the formula of midpoint price elasticity is

The elasticity of demand=(change in quantity/average quantity)/(change in price/average price)
Change in quantity=2.872-2.9=-0.028
average quantity=(2.872+2.9)/2=2.886
change in price=1.28-1=0.28
average price=(1.28+1)/2=
The elasticity of demand=(-0.028/2.886)/(0.28/1.14)

=-0.0395010395

=-0.04

the elasticity of demand is -0.04

the demand is inelastic.