Question:
Suppose a rise in the price of a good from Rs. 40 to Rs. 50 causes a decrease in quantity demanded from 1600 to 1400 units. In this range of the demand curve, the price elasticity of demand is
(1) – 6.0
(2) – 3.0
(3) – 0.7
(4) – 0.6
(5) – 0.3
Correct Answer:
(4)
Answer Explanation:
To measure over a “range,” use the arc (midpoint) elasticity formula: $PED = frac{Delta Q}{Delta P} times frac{(P_1 + P_2)}{(Q_1 + Q_2)}$. Here, $Delta Q = -200$, $Delta P = 10$. So, $frac{-200}{10} times frac{(40 + 50)}{(1600 + 1400)} rightarrow -20 times frac{90}{3000} rightarrow -20 times 0.03 = -0.6$.
Topic: Elasticity Year: 2021
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