Question

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, price elasticity of demand is: 0.8. 1.2. 1.6. 8.0

Answer 1

Answer: b). Elasticity of demand is 1.2

Explanation:

Elasticity of demand measure the responsiveness of demand to a change in the price of the good.

It can be measures using the point method,

$e=\frac{Change in Quantity}{Avg. Quantity} * \frac{Avg. Price}{Change in Price}$

$e=\frac{176,000 - 224,000}{\frac{224,000+176,000}{2} } *\frac{\frac{16.20+19.80}{2} }{19.80 - 16.20}$

$e=\frac{-48,000}{200,000} *\frac{18}{3.6}$

$e=-0.24*5$

$e=-1.2$

Elasticity of demand is 1.2.