James has been selling 5000 baseball caps per month for £6

Economics Aug 07, 2020

James has been selling 5000 baseball caps per month for £6.50 each. When he increased the price to £14 he sold only 4000 baseball caps. Using the arc-elasticity formula, find the price elasticity of demand.

Expert Solution

Here,

Initial quantity =5000 baseball Caps

Initial Price = 6.5

Final Quantity = 4000 baseball Caps

Final Price = 14

Mid point of quantity = 4500

mid point of price =(14 + 6.5) /2 = 10.25

Arc Elasticity = Change in Q / Change in P * Mid point P/ Mid point Q

Arc Elasticity = (1000 / 7.5) * (10.25 / 4500 )= 0.304

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