Use the midpoint method to calculate the price elasticity of demand for potato chips that increased in price from $2.00 to $3.00. The quantity demanded decreased from 100 bags a week to 50 bags a week at the local grocery store. Round to one decimal place.
Question
Use the midpoint method to calculate the price elasticity of demand for potato chips that increased in price from 3.00. The quantity demanded decreased from 100 bags a week to 50 bags a week at the local grocery store. Round to one decimal place.
Solution
The price elasticity of demand using the midpoint method can be calculated using the following formula:
Elasticity = (Q2 - Q1) / [(Q2 + Q1) / 2] / (P2 - P1) / [(P2 + P1) / 2]
Where: Q1 = initial quantity demanded Q2 = final quantity demanded P1 = initial price P2 = final price
In this case: Q1 = 100 bags Q2 = 50 bags P1 = 3.00
Substituting these values into the formula gives:
Elasticity = (50 - 100) / [(50 + 100) / 2] / (3 - 2) / [(3 + 2) / 2] Elasticity = -50 / 75 / 1 / 2.5 Elasticity = -0.67 / 0.4
Therefore, the price elasticity of demand for potato chips in this case is -1.7 (rounded to one decimal place). This means that the demand for potato chips is elastic, and a 1% increase in price will result in a 1.7% decrease in quantity demanded.
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