Question

Last week, Michelle spent $ 30 on caviar. Today, Michelle still spends $ 30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar? (Use the midpoint formula for your calculation.)

Answer 1

Answer:

Elasticity of demand will be 1

Explanation:

Let the original price = $1

So goods purchased $=\frac{30}{1}=30$ ( As Michelle spent $30 on caviar )

Now price is doubled so new price = $2

So good purchased $=\frac{30}{2}=15$

So change in value of quantity = 30 - 15 = 15

Average value of quantity $=\frac{30+20}{2}=22.5$

Ratio of change in quantity to average quantity $=\frac{15}{22.5}=0.666$

Change in price = $2-$1 = $1

Average price $=\frac{1+2}{2}=1.5$

So ratio of change in price to average price $=\frac{1}{1.5}=0.666$

Elasticity of demand is given by =\frac{Ratio\  of\  change\  in\  quantity \ to \ average \ quantity}{ ratio \ of\  change \ in \ price \ to average \ price}=\frac{0.666}{0.666}=1