Question

In: Economics

Based on the following information, is this good price elastic or price inelastic and is it...

Based on the following information, is this good price elastic or price inelastic and is it income elastic or income inelastic. Explain your answer

	Quantity demanded
Price $50	20,000
Price $75	10,000
Income $30,000	20,000
Income $60,000	30,000

Solutions

Expert Solution

Price Elasticity of Demand

Price	Quantity Demand
$50	20000
$75	10000

Elasticity of demand = % change in Quantity demand / % change in price

% change in Quantity Demand = Change in demand / initial demand x 100

% change in Quantity Demand = -10000 / 20000 x 100

% change in Quantity Demand = -50

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

% change in price = 25 / 50 x 100

% change in price = 50

Elasticity of demand = % change in Quantity demand / % change in price

Elasticity of demand = -50 / 50

Elasticity of demand = 1

Negative sign is ignored in price elasticity of demand because of inverse relationship between price and demand.

Price elasticity of demand is unitary

Income Elasticity of Demand

Income	Quantity Demand
$30000	20000
$60000	30000

Elasticity of demand = % change in Quantity demand / % change in Income

% change in Quantity Demand = Change in demand / initial demand x 100

% change in Quantity Demand = 10000 / 20000 x 100

% change in Quantity Demand = 50

% change in Income = Change in Income / initial Income x 100

% change in Income = 30000 / 30000 x 100

% change in Income = 100

Elasticity of demand = % change in Quantity demand / % change in Income

Elasticity of demand = 50 / 100

Elasticity of demand = 0.5

As the income elasticity of demand is positive hence goods are normal as there is a direct relationship between price and income in normal goods

Rahul Sunny answered 1 week ago

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