ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A café raises the price of its sandwiches from $4.00 to $4.40 and the quantity sold falls from 500 to 450 per week. What is the price elasticity of demand (ignoring sign), using the simple percentage change method?
Price elasticity is 1.0. Price rose by 10 percent (0.40 over 4.00) and quantity fell by 10 percent (50 over 500). Dividing the percentage change in quantity by the percentage change in price gives one, which is unitary elasticity.
- A1.0Correct
- B0.1
- C10.0
- D1.1
Explanation
Percentage change in price = 0.40/4.00 = 10%. Percentage change in quantity = 50/500 = 10%. Elasticity = 10% / 10% = 1.0, so demand is unitary elastic. Using 1.1 would result from dividing by the wrong base for the quantity change.
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