Question : Find the Arc Elasticity of demand if the quantity demanded falls from 4600 to 4200 when the price of the item increases from Rs. 960 to Rs. 1000.
Option 1: - 2.23
Option 2: -2.09
Option 3: 2.23
Option 4: 2.09
Correct Answer: - 2.23
Solution : The correct option is -2.23 .
Arc elasticity is the elasticity of one variable with respect to another between two given points. It is used when there is no general way to define the relationship between the two variables. Arc elasticity is also defined as the elasticity between two points on a curve.
Arc Elasticity = [(Q2 - Q1)/((Q2 + Q1)/2)]/[(P2 - P1)/((P2 + P1)/2)]
Q1 = 4600, Q2 = 4200, P1 = Rs. 960, P2 = Rs. 1000
Arc Elasticity = [(4200 - 4600)/((4200 + 4600)/2)]/[(1000 - 960)/((1000 + 960)/2)]
Arc Elasticity = (-1/11)/(2/49)
Arc Elasticity = -49/22 = -2.23.
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