1- Free Response: Suppose that a 5% decrease in the price of chocolate bars will
ID: 1203562 • Letter: 1
Question
1- Free Response: Suppose that a 5% decrease in the price of chocolate bars will lead to a 7% increase in the quantity demanded of chocolate bars. What is the absolute value of the price elasticity of demand for chocolate bars?
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2- Suppose that at a price of $75, the quantity demanded for rooms at the Seaside Hotel is 84 rooms. If the owners increase the price to $125, then the quantity demanded falls to 56 rooms. Calculate the absolute value of the price elasticity of demand using the midpoint method.
Explanation / Answer
PED= % change in quantity/% change in price
= 7%/(-5%)
PED= -1.4
Absoulte value of PED= 1.4
2.
PED using midpoint formula=( (Q2-Q1)/(Q2+Q1)/2 ) / (P2-P1)/(P2+P1)/2
=((56-84)/(56+84)/2)/((125-75)/(125+75)/2))
= -0.8
Absolute Value of PED using midpoint method= 0.8
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