A fall in the price of lemons from $10.50 to $9.50 per bushel increases the quantity demanded from 19,200 to 20,800 bushels. The price elasticity of demand is approximately:

A fall in the price of lemons from $10.50 to $9.50 per bushel increases the quantity demanded from 19,200 to 20,800 bushels. The price elasticity of demand is approximately:

• A. 1.25
• B. 1.20
• C. 8.00
• D. 0.80

Answer: (D)

Price elasticity of demand measures how much the quantity demanded responds to a price change. To compare the percentage changes properly, use the midpoint (arc elasticity) method. The price falls from 10.50 to 9.50, a change of -1.00 on an average price of (10.50 + 9.50)/2 = 10.00, so the percent change in price is -1.00 / 10.00 = -10%. The quantity rises from 19,200 to 20,800, a change of +1,600 on an average quantity of (19,200 + 20,800)/2 = 20,000, so the percent change in quantity is +1,600 / 20,000 = +8%. Elasticity = |8%| / | -10% | = 0.80. So the approximate elasticity is 0.80, indicating inelastic demand (quantity responds less than price does). This also explains why total revenue would fall when price decreases.

Price elasticity of demand measures how much the quantity demanded responds to a price change. To compare the percentage changes properly, use the midpoint (arc elasticity) method.

The price falls from 10.50 to 9.50, a change of -1.00 on an average price of (10.50 + 9.50)/2 = 10.00, so the percent change in price is -1.00 / 10.00 = -10%.

The quantity rises from 19,200 to 20,800, a change of +1,600 on an average quantity of (19,200 + 20,800)/2 = 20,000, so the percent change in quantity is +1,600 / 20,000 = +8%.

Elasticity = |8%| / | -10% | = 0.80.

So the approximate elasticity is 0.80, indicating inelastic demand (quantity responds less than price does). This also explains why total revenue would fall when price decreases.