Question

A discount store has a special offer on CDs. It reduces their price from Rs. $150$ to Rs. $100$. Suppose the store manager observes that the quantity demanded increases from $700$CDs to $1,300$ CDs. What is the price elasticity of demand for CDs?

• A. $8$
• B. $1.0$
• C. $1.2$
• D. $1.50$

Answer 1

Answer: (D)

$1.50$

We know arc elasticity method as
$=\frac{Q-Q1}{Q+Q1}\ast \frac{P+P1}{P-P1}$
$=\frac{700-1300}{700+1300}\ast \frac{150+100}{150-100}$
$=1.50$.

So, Arc elasticity = 1.50

(differences were large hence arc elasticity is used.)