Question

The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand? A) 1.00 B) 0.82 C) 1.22 D) 12.2

Answer 1

The absolute value of elasticity of demand when the price of cigars increases from $10 to $12 and the quantity demanded decreases from 1,000 to 800 is 1.00 (Option A). Elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price, with absolute values considered.

Step-by-step explanation:

The student is asking about the absolute value of elasticity of demand when the price of cigars increases from $10 to $12 and the quantity demanded decreases from 1,000 to 800 per day. To calculate this elasticity, one would use the formula:

Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)

First, we find the percentage change in quantity demanded and the percentage change in price:

Change in Quantity = 800 - 1000 = -200

Change in Price = $12 - $10 = $2

Original Quantity = 1000

Original Price = $10

Percentage Change in Quantity Demanded = (-200/1000) × 100 = -20%

Percentage Change in Price = (2/10) × 100 = 20%

Now, we can calculate the price elasticity of demand:

Price Elasticity of Demand = (-20% / 20%) = -1

The absolute value of the price elasticity of demand is 1.00, meaning that the answer is A) 1.00.

Note that price elasticities of demand are typically negative, indicating that the demand curve is downward sloping, but we read them as absolute values.