Question

In: Economics

The market price of milk was $5 per gallon and price elasticity was EP = –...

The market price of milk was $5 per gallon and price elasticity was E_P = – 0.6. The price on milk was reduced from $5 to $4.25 per gallon.

What will be the percentage change in the demand on milk? Increased or decreased?

Please describe the meaning and provide your comments on the given price elasticity.

Expert Solution

Price	Quantity Demand
$5.00	Not Given
$4.25	Not Given

Price elasticity of demand is also given as -0.6

Price Elasticity of Demand = % change in Quantity Demanded / % change in Price

% change in Quantity Demanded = Change in Demand / Initial Demand x 100

As no information is given regarding the quantity demanded hence we will calculate the % change in price.

% change in Price = Change in Price / Initial Price x 100

% change in Price = 4.25 - 5.00 / 5.00 x 100

% change in Price = 0.75 / 5.00 x 100

% change in Price = -15%

Price Elasticity of Demand = % change in Quantity Demanded / % change in Price

-0.6 = % change in Quantity Demanded / -15

% change in Quantity Demanded = -15 x -0.6

% change in Quantity Demanded = 9

It is noted that the percentage change in quantity demand is positive this means that quantity demanded would have increased from the initial demand as quantity demand increased by 9%.

Also, there is a negative relationship between price and quantity demand so if price decreases that means demand will increase.

Price Elasticity is 0.6 as negative is ignored in price elasticity of demand because of the inverse relationship between price and quantity demand

Pd < 1 (Inelastic Demand)

Pd = 1 (Unitary Demand)

Pd > 1 (Elastic Demand)

As the elasticity is 0.6 which is less than 1 hence demand is inelastic or less elastic.

Rahul Sunny answered 8 months ago

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