Assume that when the price of cantaloupes is $2.50 the demand for cantaloupes is

Question

Assume that when the price of cantaloupes is $2.50 the demand for cantaloupes is unit-elastic, and that the demand curve for cantaloupes is linear and downward sloping. If firms lower the price of cantaloupes to $2.00 which of the following statements can be made regarding the price elasticity of demand for cantaloupes? The demand for cantaloupes at $2.00 must be inelastic. We cannot determine whether the demand for cantaloupes is elastic or inelastic without knowing what the quantity demanded is at each price. The demand for cantaloupes at $2.00 must be elastic. The demand for cantaloupes at $2.00 must be unit-elastic.

Explanation / Answer

For a linear demand curve, demand is unit-elastic at midpoint of the demand curve.

Here, midpoint of demand = $2.50 (since demand is unit-elastic at this price).

As we move down along the demand curve, elasticity becomes higher (demand becomes more elastic) as price decreases. So, at a lower price of $2, demand is more elastic than before.

The 3rd option is correct.

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