Use the image to answer the question.
A demand curve is graphed. A line graph is titled Demand for Peanut Butter. The horizontal axis labeled Quantity goes from 0 to 600 in increments of 100. The vertical axis labeled Price goes from 0 to 2.00 dollars in increments of 0.40 dollars. A line segment passes through points (100, 2.00 dollars), (200, 1.60 dollars), (300, 1.20 dollars), (400, 0.80 dollars) and (500, 0.40 dollars).
What is the elasticity of demand for peanut butter when the price changes from $2.00 to $0.40 as shown by this supply and demand curve?
To calculate the elasticity of demand, we need to use the formula:
Elasticity of demand = percentage change in quantity demanded / percentage change in price
First, let's calculate the percentage change in quantity demanded:
Percentage change in quantity demanded = ((new quantity demanded - old quantity demanded) / old quantity demanded) * 100
The old quantity demanded is 100 units (from the point (100, 2.00 dollars)) and the new quantity demanded is 500 units (from the point (500, 0.40 dollars)).
Percentage change in quantity demanded = ((500 - 100) / 100) * 100 = 400%
Next, let's calculate the percentage change in price:
Percentage change in price = ((new price - old price) / old price) * 100
The old price is $2.00 (from the point (100, 2.00 dollars)) and the new price is $0.40 (from the point (500, 0.40 dollars)).
Percentage change in price = ((0.40 - 2.00) / 2.00) * 100 = -80%
Now we can calculate the elasticity of demand:
Elasticity of demand = (400% / -80%) = -5
Therefore, the elasticity of demand for peanut butter when the price changes from $2.00 to $0.40 is -5.