Asked by Jordan Prather on Jun 26, 2024
Verified
Blossom, Inc., sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise the price to $9, and the firm only manages to sell 460 bottles of perfume. Using the midpoint formula, the price elasticity of demand coefficient is
A) 0.33 and elastic.
B) 3 and elastic.
C) 0.33 and inelastic.
D) 3 and inelastic.
Midpoint Formula
A method used in economics to calculate the percentage change in a variable by dividing the change by the average of the initial and final values.
Price Elasticity
A measure of the sensitivity of quantity demanded or supplied to a change in price, indicating how a price change can affect market dynamics.
- Acquire knowledge on the theory of price elasticity of demand and its calculation method.
- Employ the midpoint method for determining elasticity.
Verified Answer
JN
Jocellyn NoyolaJun 27, 2024
Final Answer :
C
Explanation :
The price elasticity of demand (PED) is calculated using the midpoint formula: PED = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)], where Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices. Substituting the given values: PED = [(460 - 500) / ((460 + 500)/2)] / [(9 - 7) / ((9 + 7)/2)] = -40/480 / 2/8 = -0.0833 / 0.25 = -0.333. Since the absolute value of PED is less than 1 (0.33), the demand is inelastic.
Learning Objectives
- Acquire knowledge on the theory of price elasticity of demand and its calculation method.
- Employ the midpoint method for determining elasticity.