Question

Answer the following questions on price elasticity of demand.

a.	The price elasticity of demand for MLB tickets is –1.00. What happens to the quantity of tickets sold if ticket prices rise by 5%?
b.	The price elasticity of demand for fried chicken is –0.12. What happens to expenditures on fried chicken following a price increase?
c.	Suppose the demand for insulin is given by QD = 500. What is the price elasticity of demand at P = $100?
d.	What will happen to the price elasticity of demand if there are less substitute goods available?

Answer 1

a) The price elasticity of demand for MLB tickets is –1.00. This implies that ed = % change in quantity of tickets sold / % change in the price of tickets. Hence we have -1.00 = % change in quantity of tickets sold / 5% or % change in quantity of tickets sold = -5%. Thus, the quantity of tickets sold falls by 5%.

b) The price elasticity of demand for fried chicken is –0.12. This implies that the demand is inelastic and so when there is a price increase by a given percentage, there will be a decline in quantity sold by a given percent but this percentage is less than the percentage increase in price. Hence, expenditures on fried chicken will increase.

c) Demand for insulin is given by Q^D = 500. It is perfectly inelastic as it is unrelated to price and so at P = $100, price elasticity is 0.

d) The price elasticity of demand should fall if there are less substitute goods available. This means demand becomes more inelastic since consumers are not able to substitute easily when the price rises.