14. In the chapter, there is a discussion of a major cereal producer's decision to lower prices from $3.60 to $3.00 per fifteen ounce box. If the quantity demanded increases eighteen percent, what is the elasticity of demand?
At a glance, the elasticity appears to be approximately one, that is, unit elastic. Compare the percentage change in quantity demanded to the percentage change in price. Note that using the general formula for elasticity, there is some inconsistency in the result depending on whether you drop the price from $3.60 to $3.00, a percentage decrease of 16.7%, or raise the price from $3.00 to $3.60, a percentage increase of 20%. The elasticity result needs to be the same for this price range. Use $3.30, an average between the two prices of $3.00 and 3.60. Divide .60/3.30 = .18. Now, 18/18 = 1, which is unit elastic.
