A price increase from $5 to $7 caused quantity demanded to fall from 150 to 100 units. Using the arc formula to calculate price elasticity at a price of $7, the percentage change in quantity demanded was -0.4 and the percentage change in price was 0.33. The elasticity value calculated from these percentages using the arc formula is 1.2.

1. If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the
absolute value of the own price elasticity at a price of $7 using the arc formula?
If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the
absolute value of the own price elasticity at a price of $7 using the arc formula?
1.2
0.57
1.24
0.02
Solution
So the Correct Answer is c. 1.2
Arc elasticity of demand assumes that we should calculate
using the midpoint between the price and demand values.
Midpoint of Quantity
150 and 100 which equals
125
Midpoint of Price 5 and 7 which equals 6
% Change in Quantity -(50/125)
-
0.40
% change in Price 2/6 0.33
So E= -0.4/.33
-
1.21