An october 24, 1996 article in the washington post dicussses the completion of a new private toll road between leesburg and washington dulles international airport. It states that daily revenue from tolls increased from $14000 to 22000 when the price to of the toll decreased from $1.75 to $1.00. What is the price elasticity of demand for the toll road? show calculations.
Again, elasticity is percentage change in Q divided by percentage change in P.
To calculate the price elasticity of demand, you need to know the percentage change in quantity demanded and the percentage change in price.
Given the information in the question, the original toll price is $1.75, and the quantity demanded corresponds to a daily revenue of $14,000. When the toll price decreases to $1.00, the daily revenue increases to $22,000.
Step 1: Calculate the percentage change in quantity demanded (Q):
Percentage change in Q = (New Q - Original Q) / Original Q * 100%
New Q = $22,000 (daily revenue)
Original Q = $14,000 (daily revenue)
Percentage change in Q = ($22,000 - $14,000) / $14,000 * 100%
= $8,000 / $14,000 * 100%
= 57.14%
Step 2: Calculate the percentage change in price (P):
Percentage change in P = (New P - Original P) / Original P * 100%
New P = $1.00
Original P = $1.75
Percentage change in P = ($1.00 - $1.75) / $1.75 * 100%
= -$0.75 / $1.75 * 100%
= -42.86%
Step 3: Calculate the price elasticity of demand:
Price elasticity of demand = Percentage change in Q / Percentage change in P
Price elasticity of demand = 57.14% / -42.86%
= -1.333
The price elasticity of demand for the toll road is -1.333.