Price Elasticity of Demand Calculation in Economics

How is the absolute value of price elasticity of demand calculated?

Calculate the absolute value of price elasticity of demand when the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent.

Calculation of Absolute Price Elasticity of Demand

The absolute value of the price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

The formula for calculating price elasticity of demand is:

E = (ΔQ / ΔP)

Given that the price of cell phones increases by 5 percent (ΔP = 5%) and the quantity demanded falls by 2 percent (ΔQ = -2%), we can plug in these values into the formula:

E = (-2% / 5%) = -0.4

Since we are asked for the absolute value of the elasticity, the answer is always positive. Therefore, the absolute value of the price elasticity of demand in this case is 0.4, which corresponds to answer choice C.

So, a 5 percent increase in price resulting in a 2 percent decrease in quantity demanded gives a price elasticity of demand of 0.4.