1. (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Using the midpoint formula, show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve

A 10% change in price causes reduction by 10 units.

Explanation:

Elasticity can be solved by:

Change in quantity demanded / price change

Price change = $(1-0.20)

Change in quantity demanded = 70 - 50 = 20

So elasticity = 20/80 = 0.25

So we have that a 20 percent change in price causes reduction in quantity by 20 units. In line with this, a 10 % rise in price would make quantity to reduce by 10 units.

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