Question

Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? A. -0.05 B. -0.10 C. -0.33 D. None of the above

Answer 1

Answer:

C. -0.33

Explanation:

Elasticity is a microeconomic concept that aims to measure the sensitivity of demand in the face of price changes. To calculate the price elasticity of demand, a formula is used that divides the observed change in quantity (Q) by the change in price (P).

Elasticity = ▲ Q / ▲ P

We know that the price change was 15% = 0.15

We know that the change in quantity was -5% = -0.05

So:

Elasticity = -0.05 / 0.15 = -0.33

Plus: when the value of elasticity is less than 1, we say that demand is inelastic - little price sensitive. When elasticity is greater than 1, we say that demand is elastic (price sensitive).

In this case, the demand for haircutting is inelastic.