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Suppose the price of local cable TV service increased from $35.00 to $38.00 and as a result the number of cable subscribers decreased from 300,000 to 280,000. Along this portion of the demand curve, using the midpoint method, price elasticity of demand is approximatelyMultiple Choice−1.11.−0.84.−0.61.−1.17.

Question

Suppose the price of local cable TV service increased from 35.00to 35.00 to 38.00 and as a result the number of cable subscribers decreased from 300,000 to 280,000. Along this portion of the demand curve, using the midpoint method, price elasticity of demand is approximatelyMultiple Choice−1.11.−0.84.−0.61.−1.17.

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Solution

To calculate the price elasticity of demand using the midpoint method, we follow these steps:

  1. Calculate the percentage change in quantity demanded: Percentage change in quantity demanded=New Quantity−Old Quantity(New Quantity+Old Quantity)/2×100 \text{Percentage change in quantity demanded} = \frac{\text{New Quantity} - \text{Old Quantity}}{(\text{New Quantity} + \text{Old Quantity}) / 2} \times 100 =280,000−300,000(280,000+300,000)/2×100 = \frac{280,000 - 300,000}{(280,000 + 300,000) / 2} \times 100 =−20,000290,000×100 = \frac{-20,000}{290,000} \times 100 =−6.90% = -6.90\%

  2. Calculate the percentage change in price: Percentage change in price=New Price−Old Price(New Price+Old Price)/2×100 \text{Percentage change in price} = \frac{\text{New Price} - \text{Old Price}}{(\text{New Price} + \text{Old Price}) / 2} \times 100 =38.00−35.00(38.00+35.00)/2×100 = \frac{38.00 - 35.00}{(38.00 + 35.00) / 2} \times 100 =3.0036.50×100 = \frac{3.00}{36.50} \times 100 =8.22% = 8.22\%

  3. Calculate the price elasticity of demand: Price Elasticity of Demand=Percentage change in quantity demandedPercentage change in price \text{Price Elasticity of Demand} = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}} =−6.90%8.22% = \frac{-6.90\%}{8.22\%} =−0.84 = -0.84

Therefore, the price elasticity of demand is approximately −0.84-0.84.

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