Asked by Keshawn Johnson on Jun 17, 2024
Verified
Suppose the price of local cable TV service increased from$16.20 to$19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, using the midpoint method, price elasticity of demand is approximately
A) 0.83.
B) 1.2.
C) 1.
D) 8.
Midpoint Method
A technique used in economics to calculate the elasticity of demand or supply between two points by averaging the two end points' prices and quantities.
Cable Subscribers
Customers who pay for cable television services, often provided through a fixed infrastructure of underground or overhead cables.
Demand Curve
A graphical representation showing the relationship between the price of a good and the quantity demanded by consumers at those prices.
- Familiarize oneself with the concept of price elasticity of demand and the technique for its calculation.
- Understand how changes in price affect total revenue for products with different demand elasticities.
Verified Answer
RF
Rachel FalterJun 22, 2024
Final Answer :
B
Explanation :
The midpoint method for calculating elasticity is given by the formula: Elasticity = [(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: [(176,000 - 224,000) / ((176,000 + 224,000)/2)] / [($19.80 - $16.20) / (($19.80 + $16.20)/2)] = [-48,000 / 200,000] / [3.6 / 18] = -0.24 / 0.2 = -1.2. The negative sign indicates the direction of the change (inverse relationship), but when we talk about the magnitude of elasticity, we refer to the absolute value, which is 1.2.
Learning Objectives
- Familiarize oneself with the concept of price elasticity of demand and the technique for its calculation.
- Understand how changes in price affect total revenue for products with different demand elasticities.