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At a price of $5, consumers buy 200 units of good X. When the price falls...

At a price of $5, consumers buy 200 units of good X. When the price falls to $4, quantity demanded increases to 250 units. We can conclude that over this range, demand is:

a. elastic.

b. unit elastic.

c. inelastic.

d. perfectly inelastic.

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Answer #1

Answer: Option b. Unit Elastic.

Explanation:

Initial Price (PI) = 5,

New Price (PN) = 4,

Initial Quantity (QI) = 200,

New Quantity (QN) = 250.

PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )

PED = ( (250 − 200) / (250 + 200) / 2) / ( (4 - 5) / (4 + 5) / 2)

PED = 0.0556 / -0.0556

PED = -1

|PED| = 1. Therefore, demand is unit elastic, which means a given percentage change in price leads to an equal percentage change in demand as well.

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