A fall in the price of cabbage from $10.50 to $9.50 per bushel increases the quantity demanded from 18,800 to 21,200 bushels. The price elasticity of demand (in magnitude) is closest to:

A fall in the price of cabbage from $10.50 to $9.50 per bushel increases the quantity demanded from 18,800 to 21,200 bushels. The price elasticity of demand (in magnitude) is closest to:

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

Answer: (A)

The price elasticity of demand measures how much quantity demanded responds to a price change, using a consistent percentage-change approach. To compare changes reliably, use the arc (midpoint) method. Compute the midpoints: average price = (10.50 + 9.50) / 2 = 10.00; average quantity = (18,800 + 21,200) / 2 = 20,000. Percent changes using those midpoints: price falls by 1.00, so the price change is -1.00 / 10.00 = -0.10 (a 10% decrease). Quantity rises by 2,400, so the quantity change is 2,400 / 20,000 = 0.12 (a 12% increase). Elasticity magnitude = 0.12 / 0.10 = 1.20. So the closest value is 1.20, indicating elastic demand. If you used simple initial-base percentages, you’d get about 1.34, but the arc method is the standard for this kind of question.

The price elasticity of demand measures how much quantity demanded responds to a price change, using a consistent percentage-change approach. To compare changes reliably, use the arc (midpoint) method.

Compute the midpoints: average price = (10.50 + 9.50) / 2 = 10.00; average quantity = (18,800 + 21,200) / 2 = 20,000.

Percent changes using those midpoints: price falls by 1.00, so the price change is -1.00 / 10.00 = -0.10 (a 10% decrease). Quantity rises by 2,400, so the quantity change is 2,400 / 20,000 = 0.12 (a 12% increase).

Elasticity magnitude = 0.12 / 0.10 = 1.20.

So the closest value is 1.20, indicating elastic demand. If you used simple initial-base percentages, you’d get about 1.34, but the arc method is the standard for this kind of question.