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If the price of Good X rises from $4 to $5, and the quantity demanded of it falls from 200 units to 180 units, the absolute value of the price elasticity of demand, using the midpoint as the base, is:

Sagot :

Answer:

-0.4725

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = midpoint change in quantity demanded / midpoint change in price  

Midpoint change in quantity demanded = change in quantity demanded / average of both demands

change in quantity demanded = 180 - 200 = -20

average of both demands = (200 + 180 ) / 2 = 190

-20/190 = -0.105

midpoint change in price = change in price / average of both price

change in price = $5 - $4 = 1

Average of both price ($5 + $4) / 2 = $4.5

$1 / $4.5 =  0.222

-0.105 /  0.222 = -0.4725

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.  

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.  

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