ECON MICRO
ECON MICRO
5th Edition
ISBN: 9781337000536
Author: William A. McEachern
Publisher: Cengage Learning
bartleby

Videos

Textbook Question
Chapter 5, Problem 1.1P

(Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of Si per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Using the midpoint formula, show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?

Expert Solution & Answer
Check Mark
To determine

The price elasticity of demand by using a midpoint formula.

ConceptIntroduction:

Price Elasticity of Demand: It is the degree of responsiveness to change in quantity demanded due to change in price level.

Midpoint formula for measuring the elasticity of demand is given as follows:

e=ΔQΔP× [ P1+ P22Q1+ Q22 ]

Where,

ΔQ=Q2Q1

ΔP=P2P1

Explanation of Solution

We have presented the information in following table:

Price (in $) Quantity (in units)
$1 50
$0.20 70

By applying the mid-point formula, we get

e= 200.80×[ 1+ 0.20250+702 ]

On solving the above, we get,

e=0.25

Hence, elasticity of demand using midpoint formula is 0.25

Now, if the elasticity of demand remains constant along the demand curve, then a 10% rise in the price will reduce the quantity demanded. We can calculate the amount of reduction in quantity demanded in following way.

e=[ % change in quantity demanded% change in price ]

0.25=[ % change in quantity demanded10% ]

So, the quantity demanded will decrease by 2.5%

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
ONLY ANSWER QUESTION #2 1. Online the timing and tailoring of prices to specific models of products is the key to successful pricing in online markets. And “Thanks to the ready availability of data in online markets, a pricing manager can easily approximate the elasticity of demands for the different products it sells online.”Assuming a 10 percent decrease in price increases sales by 28 percent, calculate the price elasticity of demand? If the wholesale price of the online product is $50 and sells at a price comparison site that charges $.50 per click and boasts a conversion rate of 5 percent (an average of 20 clicks are needed to generate a sale). What price should you charge for the product? What is the optimal markup on cost? 2. The authors assert that price sensitivity is affected by (1) product life cycles, and (2) numbers of competitors. In fact, “when the number of competing sellers doubles, a firm’s elasticity of demand is expected to double (and you should be able to verify…
#4 Determining the price elasticity of demand of a product involves all of the following factors, but NOT the total number of firms in a market.   the availability of substitutes to the product.   whether the product is a luxury or a necessity.
23) Suppose the price elasticity of demand for a product is 1.8. If a supplier wants to increase revenue, they shoud (increase or decrease price- SELECT ONE) increase 24) Goods that are considered luxuries tend to be more (price elastic or price inelastic- SELECT ONE)price elastic 25) When the price is increased and total revenues increase, the elasticity of demand is (price elastic or price inelastic- SELECT ONE)price inelastic
Knowledge Booster
Economics
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • 1. Online the timing and tailoring of prices to specific models of products is the key to successful pricing in online markets. And “Thanks to the ready availability of data in online markets, a pricing manager can easily approximate the elasticity of demands for the different products it sells online.” Assuming a 10 percent decrease in price increases sales by 28 percent, calculate the price elasticity of demand? If the wholesale price of the online product is $50 and sells at a price comparison site that charges $.50 per click and boasts a conversion rate of 5 percent (an average of 20 clicks are needed to generate a sale). What price should you charge for the product? What is the optimal markup on cost? 2. The authors assert that price sensitivity is affected by (1) product life cycles, and (2) numbers of competitors. In fact, “when the number of competing sellers doubles, a firm’s elasticity of demand is expected to double (and you should be able to verify this through…
    Question 1. Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer. explain and provide graphs where applicable
    Only typed answer Suppose the price of a good increased from $3 to $4. In response, the consumer has decreased his consumption from 15 units to 10 units. The price elasticity of demand is
  • Subject: Business economics Remaining: Q3) Colgate sells its standard size toothpaste for Rs. 25. Its sales have been on an average 8000 units per month over the last year. Recently, its competitor Sparkle reduced the price of its same standard size toothpaste from Rs. 35 to Rs. 30. As a result Colgate sales declined by 1500 units per month. Calculate the cross elasticity between the two products. What does your estimate indicate about the relationship between the two?
    Question 4The Pear company sells a smart phone for $250. Its sales have averaged 8,000 units per month over the last year. Recently, its closest competitor Banana company reduced the price of its smart phone from $350 to $300. As a result, Pear’s sales declined by 1,500 units per month. (a) What is the cross price elasticity of demand between the Pear and             Banana smart phone? Use the averaging formula. What does this indicate about the relationship between the two products? (b) If the Pear company knows that the price elasticity of demand for its phone is -1.5, what price would the Pear company have to charge to sell the same number of units as it did before the Banana company price cut? Assume that Banana company holds its price of its phone constant at $300. Use the averaging formula.
    P1= $4.50        Q1= 45 P2= $5.00        Q2= 40 a) what is price elasticity of demand  b) given the price elasticity of demand coefficient you have calculated. What would happen to the quantity demanded in percentage terms if the price increased by 10% in this range ? c) what would be the effect of the price increase above on total revenue? Explain.
    • SEE MORE QUESTIONS
    Recommended textbooks for you
  • Principles of Microeconomics
    Economics
    ISBN:9781305156050
    Author:N. Gregory Mankiw
    Publisher:Cengage Learning
    Microeconomics
    Economics
    ISBN:9781337617406
    Author:Roger A. Arnold
    Publisher:Cengage Learning
    Economics (MindTap Course List)
    Economics
    ISBN:9781337617383
    Author:Roger A. Arnold
    Publisher:Cengage Learning
  • ECON MICRO
    Economics
    ISBN:9781337000536
    Author:William A. McEachern
    Publisher:Cengage Learning
    Principles of Economics 2e
    Economics
    ISBN:9781947172364
    Author:Steven A. Greenlaw; David Shapiro
    Publisher:OpenStax
    Exploring Economics
    Economics
    ISBN:9781544336329
    Author:Robert L. Sexton
    Publisher:SAGE Publications, Inc
  • Principles of Microeconomics
    Economics
    ISBN:9781305156050
    Author:N. Gregory Mankiw
    Publisher:Cengage Learning
    Microeconomics
    Economics
    ISBN:9781337617406
    Author:Roger A. Arnold
    Publisher:Cengage Learning
    Economics (MindTap Course List)
    Economics
    ISBN:9781337617383
    Author:Roger A. Arnold
    Publisher:Cengage Learning
    ECON MICRO
    Economics
    ISBN:9781337000536
    Author:William A. McEachern
    Publisher:Cengage Learning
    Principles of Economics 2e
    Economics
    ISBN:9781947172364
    Author:Steven A. Greenlaw; David Shapiro
    Publisher:OpenStax
    Exploring Economics
    Economics
    ISBN:9781544336329
    Author:Robert L. Sexton
    Publisher:SAGE Publications, Inc
    Price Elasticity of Supply; Author: Economics Online;https://www.youtube.com/watch?v=4bDIm3j-7is;License: Standard youtube license