Question

Suppose that a change ? ( 2 ) in the price of bread from R10 to R12.50 leads to a change in the quantity demanded of bread from 65 90 units. Use the arc units to elasticity method to calculate and interpret the price elasticity of demand for bread ( 4 )

Answer 1

PE_d =$-0.38462\over 0.25$ =-1.5384 which is different from 0.25

Arc Ed=$\dfrac{[\dfrac{(Qd\scriptstyle 2-Qd\scriptstyle 1)}{midpoint~Qd}]}{[\tfrac{P_2-P_1}{midpoint P}]}$

=midpoint Q_d =${Qd_1+Qd_2 \over 2}$ =${65+90 \over 2}$ = 77.5

midpoint price =${P_1+P_2 \over 2}$ =${12.5+10 \over 2}$ =11.25

% change in quantity demanded =$(90-65) \over 77.5$ =0.3226

$\% ~change ~in ~price$ =$(10-12.5)\over 11.25$ =-0.22222

Arc E_d =$\dfrac{0.3226}{-0.2222}$

=-1.4517

This shows that increase in price by 1 unit reduces demand unit by 1.4517