Question

1) (Determinants of elasticity of demand)

Which of these is an example of a product that could be considered to have inelastic demand?

Group of answer choices

-A flower arrangement where there are many to choose from of equal quality

-You need to upgrade your computer in the next 6 months

-Utility bill for water service

-Purchasing a new home

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2)

Pulling some information from a demand curve graph we get the following data points:

Q	P
55	20¢
25	40¢

How would you classify the elasticity of demand for this demand curve data?

Group of answer choices

-Perfectly Elastic

-Inelastic

-Perfectly Inelastic

-Unit Elastic

-Elastic

Answer 1

1.Ans: Utility bill for water service

Explanation:

Inelasticity of demand refers to that there is no change in demand with respect to the change in pirce or income. It means the demand for a good or service does not respond to the any change in the determinants of elasticity of demand.So the utility bill for water service could be considered to have inelastic demand.

2.Ans: Elastic

Explanation:

Initial price ( P1) = $20

New price ( P2) =$40

Initial quantity ( Q1) = 55

New quantity ( Q2) = 25

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 25 - 55 ) / ( 40 -20 ) } * {( 20 + 40 ) / ( 55 + 25) }

= ( -30 / 20 ) * ( 60 / 80)

= - 1.5 * 0.75

= -1.125 or 1.125 ( absolute value)

When Price Elasticity of Demand > 1 , then the price elasticity of demand is elastic.

When Price Elasticity of Demand < 1 , then the price elasticity of demand is inelastic.

When Price Elasticity of Demand = 1 , then the price elasticity of demand is unit elastic.