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16 October, 02:25

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

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  1. 16 October, 02:31
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    Price Elasticity of demand = 3

    Explanation:

    The elasticity of demand indicates how the quantity demanded change when the price changes. Is defined by this equation:

    Price Elasticity of Demand (PED) = Percentage change in Q / Percentage change in P

    In this case, the problem is giving both percentage changes:

    Percentage change in Q = - 15% (It is negative because the number of haircuts decreased)

    Percentage change in P = + 5%

    PED = - 15%/5% = - 3

    The PED is always negative because the demand curve has a negative slope. This happens because at lower prices the quantity demanded is high and at high prices the quantity demanded is low.
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