Question

3. Using the midpoint method The following graph shows two known points (X and Y) on a demand curve for tomatoes, PRICE (Dollars per pound) Demand O + 0 + 10 20 30 40 50 60 70 80 90 QUANTITY (Thousands of pounds of tomatoes) 100 , which suggests According to the midpoint method, the price elasticity of demand for tomatoes between point X and point Y is approximately that the demand for tomatoes is between points X and Y.

Answer 1

Price at point X (P1) = $2

Quantity at point X (Q1) = 80

Price at point Y (P2) = $3

Quantity at point Y (Q2) = 70

Price elasticity using mid-point method = {(Q2 - Q1) / [(Q2 + Q1) / 2]} / {(P2 - P1) / [(P2 + P1) / 2]}

= {(70 - 80) / [(70 + 80) / 2]} / {(3 - 2) / [(3 + 2) / 2]}

= [(-10 / 75) / (1 / 2.5)]

= -0.13 / 0.4

= -0.325

We can ignore the negative sign here as there would always be negative sign due to negative relation between price and quantity demanded. Thus elasticity of demand equals 0.325

If elasticity of demand is between 0 and 1, good is inelastic.

If elasticity of demand is greater than 1, good is elastic.

Here tomatoes have inelastic demand.