Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? A. - 0.05 B. - 0.10 C. - 0.33 D. None of the above

Question

Lisa Moyer

Business

8 May, 04:15

Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? A. - 0.05 B. - 0.10 C. - 0.33 D. None of the above

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Answers (1)

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Rylie Mckee · Answer 1

C. - 0.33

Explanation:

Elasticity is a microeconomic concept that aims to measure the sensitivity of demand in the face of price changes. To calculate the price elasticity of demand, a formula is used that divides the observed change in quantity (Q) by the change in price (P).

Elasticity = ▲ Q / ▲ P

We know that the price change was 15% = 0.15

We know that the change in quantity was - 5% = - 0.05

So:

Elasticity = - 0.05 / 0.15 = - 0.33

Plus: when the value of elasticity is less than 1, we say that demand is inelastic - little price sensitive. When elasticity is greater than 1, we say that demand is elastic (price sensitive).

In this case, the demand for haircutting is inelastic.