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 8 months agoRelated Solutions
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