Question

What can you conclude about the price elasticity of demand from each of the following statements? (Is it: perfectly elastic, elastic, unit elastic, inelastic, perfectly inelastic)

a. "The pizza delivery business is very competitive in this town. I'd lose half my customers if I raised the price by as little more than 10%."

b. "I own the only chicken farm in Hong Kong that produces organic free-range eggs. I recently increased my production by 20%, and found that the price that I could sell the eggs at dropped by 10%."

c. My professor has required the use of the Krugman textbook for the class. I have no choice but to buy this book."

d. No matter what the price is, I always spend a total of exactly $100 per month buying coffee beans."

please give me answers with detailed explanations. thank you.

Answer 1

When the percentage change in quantity demanded is infinite even if the percentage change in price is zero, the demand is said to be perfectly elastic.

Elastic demand is when price or other factors have a big effect on the quantity consumers want to buy. If the price goes down just a little, consumers will buy a lot more and vice versa.

Unit elastic describes a demand curve which is perfectly responsive to changes in price. That is, the quantity demanded changes according to the same percentage as the change in price.

Inelastic demand is when the buyer's demand does not change as much as the price changes.

Perfectly inelastic demand means that quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price.

Answers:

a. Elastic demand- This statement says that a 10% increase in price reduces the quantity demanded by 50%. The price elasticity of demand is , Ed = -50% ÷ 10% = -5 , | Ed | = 5 , Ed >1 ,Therefore, when the elasticity coefficient is greater than 1, it means that the percentagechange is quantity demanded is greater than the percentage change in price, indicating that consumers are sensitive to the change in price, so the price of elasticity of demand iselastic.

b. Elastic demand- since the change in quantity demanded is twice the change in price, it is relatively elastic demand.

c. Perfectly Inelastic demand -since the student has no choice but to buy the book no matter what its price, indicating that the price of elasticity of demand is zero, so that price of elasticity of demand is perfectly inelastic.

d. Inelastic demand - since the consumer always spends a fixed amount of income on buying coffee beans, the consumer has an inelastic demand. Increase or decrease in prices will vary the quantity by little amounts since the quantity the consumer will buy remains = $100/ price of coffee beans.