Suppose the price of peaches rises from $5.50 to $6.60 per unit and the quantity demanded falls from 12,500 to 11,250 units. The price elasticity of demand is approximately:

• A. 1000.0
• B. 2.0
• C. 0.5
• D. 1.0

Answer: (C)

The main concept here is price elasticity of demand, which measures how responsive quantity demanded is to a price change. It’s the percent change in quantity demanded divided by the percent change in price.

First, the price rises from 5.50 to 6.60, a increase of 1.10. That’s 1.10 divided by 5.50, about 0.20, or a 20% increase. The quantity demanded falls from 12,500 to 11,250, a change of -1,250. That’s -1,250 divided by 12,500, which is -0.10, or a 10% decrease.

Elasticity = (−10%) / (+20%) = −0.5, so the magnitude is 0.5. The negative sign reflects the inverse relationship between price and quantity demanded, but we usually report the absolute value for elasticity.

So the correct value is approximately 0.5, indicating inelastic demand (quantity responds less than proportionally to price changes). If you used the midpoint method, you’d get a result a bit above 0.5, still around 0.5.