Determine the price elasticity of demand for a microwave that experienced a 20% drop in price and a 50% increase in weekly quantity demanded.
Question
Determine the price elasticity of demand for a microwave that experienced a 20% drop in price and a 50% increase in weekly quantity demanded.
Solution
To determine the price elasticity of demand, we use the formula:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Given in the problem, we have:
% Change in Quantity Demanded = 50% % Change in Price = -20%
Substitute these values into the formula:
Price Elasticity of Demand = 50% / -20% = -2.5
The negative sign indicates that this is a normal good, meaning that as the price decreases, the quantity demanded increases. The magnitude of 2.5 indicates that this good is elastic, meaning that the quantity demanded is sensitive to changes in price.
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