3. The price elasticity of demand for ice-cream sandwiches is 1.2 at the current price of $0.50 per sandwich and the current consumption level of 100,000 sandwiches. Calculate the change in the quantity demanded when price rises by $0.05. Use Equations 5-1 and 5-2 to calculate percent changes and Equation 5-3 to relate price elasticity of demand to the percent changes.
Since price rises, we know that quantity demanded must fall. Given the current price of $0.50, a $0.05 increase in price represents a 10% change, using the method in Equation 5-2. So the price elasticity of demand is
so that the percent change in quantity demanded is 12%. A 12% decrease in quantity demanded represents 100,000 × 0.12, or 12,000 sandwiches.