Lulu hyper market reduces the price of oranges from OMR 5 per kg to OMR 3....

Lulu hyper market reduces the price of oranges from OMR 5 per kg to OMR 3. Hence, the weekly sales increase from 8,000 to 10,000 units.

Answer the questions:

Q1. Calculate the price elasticity of demand with clear steps of working.

Q2. The observed value belongs to which type of price elasticity of demand.

Q3. Describe in your own idea the demand situation and the shape of its curve in relation to the market changes.

Solutions

Expert Solution

1. P1 = 5 Q1 = 8,000

P2 = 3 Q2 = 10,000

Price elasticity of demand = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

= (10,000 - 8,000) / (3 - 5) * (5 + 3) / (8,000 + 10,000)

= (2,000 / -2) * (8 / 18,000)

= 16,000 / -36,000

= -0.4

The absolute value of PED is 0.4.

2. Since the observed value of Price elasticity of demand is less than 1, the demand for the good is relatively inelastic.

3. Since the demand for oranges is relatively inelastic demand, the demand curve would be relatively steeper shape. It means a percentage change in price og oranges will lead to a lesser percentage change in quantity demanded for oranges.

Rahul Sunny answered 2 years ago

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