Question

1. Suppose the demand for coffee mugs is represented by the following demand curve: Qd = 50 – 2P. Further, suppose that the current price is $5. a. (5 points) What is the current quantity demanded? Show your work. b. (15 points) Calculate the current price elasticity of demand and show all your work. Interpret the number you calculated (I’m looking for more than just “elastic” or “inelastic". c. Suppose when the price of ice cream is $2 there are 60 units sold and when the price falls to $1 there are 100 units sold. Calculate and fully interpret the price elasticity of demand. d. List 3 goods based on their price elasticity of demand. The first good is the most inelastic and the third good is the most elastic. Fully justify your ranking.

Answer 1

Answer a : Current Quantity demanded= 50-2P= 50-2($5)= 50-10= 40units

b : price elasticity of demand= % change in quantity demanded/%change in price

Price = $5 , Quantity demanded= 40 units

Price = $6 , Quantity demanded= 38 units

Price elasticity of demand =( 2/40)*100/ (1/5)*100= 5%/20%

E_{​​​​​​ d} = 0.25

Price Elasticity of demand is less than 1. It shows that it is an inelastic demand.

C : price of ice cream= $2, qty demanded = 60 units

Price of ice cream= $1, qty demanded=100 units

E _d = % change in quantity demanded/% change in price= 66.67%/ 50%= 1.333

Price elasticity is more than 1. It means that there is an elastic demand.

D: Gasoline, water are price inelastic. As price increases demand does not decrease or consumption level remaim same.

Tea and oats are less inelastic. As price increase there consumption start decreasing but less than price.

Motorcycle or furniture as well as professional services are least inelastic. These things are greatly influence the least.