The demand curve suggests that an auto manufacturer will sell 20,000 Mercedes-Benz M-Class vehicles when they are priced at $50,800, but whe

The demand curve suggests that an auto manufacturer will sell 20,000 Mercedes-Benz M-Class vehicles when they are priced at $50,800, but when the price is reduced to $45,000, that quantity will increase to 27,000 units. What is the resulting elasticity?
a. -4.38
b. 6.73
c. -3.07
d. 1.24

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  1. Answer:

    c. -3.07

    Explanation:

    price elasticity of demand = % change in quantity demanded / % change in price

    • % change in quantity demanded = (27,000 – 20,000) / 20,000 = 0.35 = 35%
    • % change in price = (45,000 – $50,800) / $50,800 = -0.114 = 11.4%

    price elasticity of demand = 35% / -11.4% = -3.07 or |3.07| in absolute terms

    since the price elasticity is higher than |1|, then it is price elastic, which means that a 1% change in price will change the quantity demand in a higher proportion.

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  2. The elasticity of demand will be -3.07.

    The percentage change in quantity will be:

    = (27000 – 20000) / 20000 × 100

    = 7000/20000 × 100

    = 35%

    The percentage change in price will be:

    = (45000 – 50800) / 50800 × 100

    = -5800/50800 × 100

    = -11 417%

    Therefore, the elasticity will be:

    = 35% / -11.417%

    = -3.07.

    In conclusion, the correct option is -3.07.

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