Assume you are working at a department store and you are told by the manager to cut prices by 20% for all the new women's sweaters that are currently priced at $50
What will be the new price of these sweaters? Suppose the manager tells you to raise the prices back up by 20%. What is the new price of the sweaters? Why is your answer not the same as the original price of the sweaters? What importance does this have for why the midpoint formula is used in calculating price elasticity?
The new price of the sweaters will be $40 . If you are asked to increase the price of the sweaters back up by 20% the new price will be $48, not $50 . The reason is that the even though the price change in percentage terms was the same going in both directions the starting point was different. The same percentage change for a smaller number is going to be an absolutely smaller number. This fact has an important factor to play in why we use the midpoint formula. If we didn't use the midpoint formula we would get different price elasticities of demand depending on whether their was a price increase or a price decrease. The bias concerning which base you are using is eliminated using the midpoint formula.
You might also like to view...
The present value of an asset and the rate of interest
a. are not related b. are related inversely c. cannot change in opposite directions d. are equivalent e. are directly related
What is the "beggar-thy-neighbor" policy, and why is it a problem for the country that caused it?
What will be an ideal response?
If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of spinning class has risen from $20 to $30, then
A. pizzas have become relatively more expensive. B. spinning classes have become relatively more expensive. C. the relative prices of pizzas and spinning classes have remained constant. D. workers’ real income must have decreased.
Consider a Stackelberg duopoly with the following inverse demand function: P = 100 ? 2Q1 ? 2Q2. The firms' marginal costs are identical and are given by MCi = 2. Based on this information, the Stackelberg leader's marginal revenue function is:
A. MR(QL) = 50 ? 2QL + c1/2. B. MR(QL) = 50 ? 2QL + c2/2. C. MR(QF) = 100 ? QF + c2/2. D. MR(QF) = 100 ? 2QF + c1/2.