Question

19-4. In a local market, the monthly price of Internet access service decreases from $20 per account to $10 per account, and the total quantity of monthly accounts across all Internet access providers increases from 100,000 to 200,000. What is the price elasticity of demand? Is demand elastic, unit-elastic, or inelastic?

19-7. In the market for hand-made guitars, when the price of guitars is $800, annual revenues are $640,000. When the price falls to $700, annual revenues decline to $630,000. Over this range of guitar prices, is the demand for hand-made guitars elastic, unit-elastic, or inelastic?

Answer 1

(1) Price decrease from $20 to $10, as a result the total quantity demanded increase from 100,000 to 200,000

Price	Quantity demanded
P1 = 20	Q1 = 100,000
P2 = 10	Q2 = 200,000

Mid point formula:

Ed = [(Q2 - Q1) / (Q2 + Q1) /2] ÷ [(P2 - P1) / (P2 + P1) /2]

=> Ed = [(200,000 - 100,000) / (200,000 + 100,000)/2] ÷ [(10 - 20) / (10 + 20) /2]

=> Ed = [(100,000) / (300,000) /2] ÷ [(-10) / (30)/2]

=> Ed = [100,000 / 150,000] ÷ [-10 / 15]

=> Ed = [100,000 / 150,000] * [-15 /10]

=> Ed = -1

Demand is unitary elastic.

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(2) Relationship between price change and revenue change.

In case of elastic demand, there is negative relationship between price change and revenue change.

In case of inelastic demand, there is positive relationship between price change and revenue change.

In case of unit elastic demand, there is no relationship between price change and revenue change. It means change in price leads to no change in revenue.

Decrease in price from $800 to $700 leads to decrease in annual revenue from $640,000 to $630,000. Since there is a positive realtionship between price and revenue change. So, over this range, the demand is inelastic.