CA Foundation P4 · Chapter 2 · Question 5 of 15
When the price of a good rises from Rs. 10 to Rs. 12, quantity demanded falls from 150 units to 100 units. Using the arc (midpoint) method, price elasticity of demand is:
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Reveal answer & explanation
Correct answer: C) 2.2
Explanation
Arc elasticity = (dQ / average Q) / (dP / average P). dQ = 50, average Q = (150 + 100)/2 = 125, so 50/125 = 0.4. dP = 2, average P = (10 + 12)/2 = 11, so 2/11 = 0.1818. Ed = 0.4 / (2/11) = 0.4 x 11/2 = 2.2. Using the original base instead gives (50/150)/(2/10) = 1.67, a common error.
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