Question

When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, what do you know about the elasticity of demand for bubble gum?

Answer 1

Answer:

Q1 = 400 packs at P1 = 0.50

Q2 = 600 packs at P2 = 0.40

%age change using midpoint formula = (X new - X old )/X average

average quantity = (400 + 600)/2 = 500

average price = (0.40 + 0.50)/2 = 0.45

%age change in Quantity = (600 - 400)/500 = 200/500 = 40%

%age change in price = (0.40 - 0.50)/0.45 = -0.10/0.45 = -22.22%

elasticity = %change in quantity/%change in price = -40%/22.22% = -1.80

Explanation:

Thus, as Elasticity is less than -1, the demand for bubble gum is elastic. A decrease in the price results in an increase in the demand. The %age increase in demand is more than the %age increase in price as elasticity.