The Federal Government is in the process of building a National Broadband Networ

Question

The Federal Government is in the process of building a National Broadband Network, which will increase the internet upload and download speeds across Australia. An independent cost benefit analysis has been conducted. It was estimated that at a price of $130 per month, demand for a new high speed broadband would be 91% of the market, while at a price of $155 per month, demand would be 71% of the market. It cannot be assumed that the demand curve is linear.

Calculate the midpoint price elasticity of demand for the high speed broadband. Round your answer to the nearest two decimal places, giving a positive value for elasticity.

Explanation / Answer

Using midpoint method,

Elasticity = (Change in market share / Average market share) / (Change in price / Average price)

= [(71 - 91) / (71 + 91)] / [(155 - 130) / (155 + 130)]

= (- 20 / 162) / (25 / 285)

= - 1.41

Absolute value = 1.41

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