Question

When the price of a can of Coca-Cola increased from 60 cents to 80 cents a can, the quantity dropped from 1 million cans per day to 500,000 cans per day. Using the midpoint formula for computing the elasticity, the price elasticity of demand for Coca-Cola is:

a. Unit elastic
b. Inelastic
c. –2.33
d. –0.233
e. –1.5

Answer 1

Answer:

The correct answer is option c.

Explanation:

The price of a can of Coca-Cola rises from 60 cents to 80 cents.

The quantity demanded declines from 1,000,000 to 500,000 cans.  

The price elasticity of demand measures the percentage change in quantity demanded due to a percentage change in price.  

The midpoint formula measures the percentage change by dividing the change in variables by the average value of initial value and the final value of a variable.

The midpoint price elasticity of demand is

= $\frac{\% \Delta Q}{\% \Delta P}$

= $\frac{\frac{Q2 - Q1}{\frac{Q2 + Q1}{2} } }{\frac{P2 - P1}{\frac{P2 + P1}{2} } }$

= $\frac{\frac{500,000 - 1,000,000}{\frac{500,000 + 1,000,000}{2} } }{\frac{80 - 60}{\frac{80 + 60}{2} } }$

= $\frac{\frac{-500,000}{\frac{1,500,000}{2} } }{\frac{20}{\frac{140}{2} } }$

= $\frac{\frac{-500,000}{750,000} }{\frac{20}{70} }$

= $\frac{- 0.6667}{0.2857}$

= -2.33