Suppose the quantity demanded of ice cream cones increases from 400 to 425 cones a day when the price is reduced from $1.50 to $1.25. In this situation, what is the elasticity of demand calculated using the average method

-0.33

Explanation:

Price elasticity of demand is defined as the degree of responsiveness of change in demand w.r.t change in the price. It can be calculated using the following method:

Percentage change in quantity = × 100

  wherein  = Current quantity demanded i.e 425 units

                 = Original quantity demanded i.e 400 units

                                                    = × 100

                                                    = × 100

                                                    = 6.061%

Similarly, percentage change in price =  × 100  

where,   = Changed price i.e $ 1.25

              = Original price  i.e  $1.5

                                                               = × 100

                                                               =  × 100

                                                               = - 18.18 %

Now, price elasticity of demand is given by,

=    = = - 0.33

This conveys that price elasticity of demand is inelastic.

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