Answer to Question #219561 in Economics for yoyo

Question

If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity

a)         What is the level of elasticity?

b)         What is the interpretation the result

Answer 1

(a) By the definition of the arc price elasticity, we have:

$$E_d=\dfrac{\%\Delta Q}{\%\Delta P}=\dfrac{\dfrac{Q_2-Q_1}{0.5(Q_2+Q_1)}}{\dfrac{P_2-P_1}{0.5(P_2+P_1)}},$$ $$E_d=\dfrac{\dfrac{7400-10000}{0.5\cdot(7400+10000)}}{\dfrac{\$3-\$2.50}{0.5\cdot(\$3+\$2.50)}}=-1.64.$$

(b) As we can see from calculations, $E_d>1$. Therefore, the demand is elastic.