Question:
Suppose the market demand function for a certain consumer good is represented by $Q_D = 500 – 5P$. What is the arc price elasticity of the demand of this good over the price range of Rs. 20 and Rs. 30?
(1) – 0.25
(2) – 0.33
(3) – 0.43
(4) – 0.52
(5) – 0.66
Correct Answer:
(2)
Answer Explanation:
Calculate the quantities at both prices: At P=20, Q = 500 – 5(20) = 400. At P=30, Q = 500 – 5(30) = 350. The Arc Elasticity formula is $(frac{Delta Q}{Delta P}) times (frac{P_1 + P_2}{Q_1 + Q_2})$. Plugging in the values: $(frac{-50}{10}) times (frac{20 + 30}{400 + 350}) = -5 times (frac{50}{750}) = -5 times 0.066 = -0.33$.
Topic: Elasticity Year: 2020
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