Question

Question 4
(A) Explain the factors that affect the price elasticity of demand for a product.

(B) At a price of $50 a bookshop can sell 200 copies of a textbook each month.If it reduces the price to $45 it can increase its sales to 212, what is the price elasticity

of demand?
(C) How would the incidence of an indirect tax between producers(sellers) and

consumers(buyers) if
(i) Demand for the good is elastic and supply of the good is inelastic.

(ii) The elasticity of demand for and elasticity of supply of the good are the same.

Use well-labelled diagram(s) to support your views.

- End -

(Total 25 marks)

Answer 1

Solution :

Given That :

a.)

Factors affecting elasticity of demand:

Need of product: If a good is necessary good, its demand would be inelastic while luxury good have elastic demand.
Availability of Income: Rise in income raise consumers willingness to pay for a good which ultimately raise elasticity of a good.
Uses of a good: If a product can be used for multiplier purposes, its demand would be inelastic.
Availability of substitute: If there is no substitute available, demand of good would be inelastic.
b.)

Demand at $50 is 200 copies

Demand at $45 is 212 copies

Elasticity of demand = %change in quantity demanded / %change in price

%change in quantity demanded =

%change in quantity demanded = 6%

%change in price =

%change in price = -10%

Elasticity of demand [6% / (-10%)] = -0.6

We can ignore the negtive sign of elasticity of demand because of negative relationship between price and quantity demanded. Thus, elasticity of demand = 0.6

c.)

i.)

Demand is elastic and supply is inelastic: Price paid by consumer rises from Pe to Pb while price received by producer fall to Pp from Pe. Thus, more tax burden fall on producer.

ii.)

Tax burden fall equally on producer as well as consumer.

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