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.
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Refer to Table 16.2. Nominal GDP for Fredonia for 2015 equals
A) $2,750. B) $3,500. C) $4,325. D) $5,500.
Foreign direct investment in the United States declined 42 percent in the first quarter of 2009. This means that
A) people or firms in other countries reduced their building of facilities or purchases of facilities in the United States by 42 percent in the first quarter of 2009. B) people or firms in the United States reduced their purchases of stocks and bonds in foreign countries by 42 percent in the first quarter of 2009. C) people or firms in other countries reduced their purchases of stocks and bonds in the United States by 42 percent in the first quarter of 2009. D) people or firms in the United States reduced their building of facilities or purchases of facilities in foreign countries by 42 percent in the first quarter of 2009.