Question

3. Using the midpoint method

The following graph shows two known points (X and Y) on a demand curve for oranges.

1.According to the midpoint method, the price elasticity of demand for oranges between point X and point Y is approximately (0.03, 0.05, 0.63, 1.6) , which suggests that the demand for oranges is (elastic, inelastic)between points X and Y.

Answer 1

At point X, Price = $2 and Quantity = 90 (thousand)

At point Y, Price = $3 and Quantity = 70 (thousand)

Elasticity = (Change in Quantity / Average quantity) / (Change in price / Average price)

= [(70 - 90) / (70 + 90)] / [$(3 - 2) / $(3 + 2)]

= (- 20 / 160) / (1 / 5)

= - 0.625

Absolute value of elasticity is approximately 0.63, which suggests that demand is inelastic (Since absolute value of elasticity is less than 1).