Samsung is interested in the elasticity of demand in the smart phones market, so it hired...

Samsung is interested in the elasticity of demand in the smart phones market, so it hired an economist to estimate the demand for smart phones. She found that, in the short run, demand is Qd=100-0.5P, and in the long run, demand is Qd=120-0.6P. In both the long run and the short run, P=$50

a. What is the price elasticity of demand in the short run?

b. What is the price elasticity of demand in the long run?

c. Given your answers to a. and b., is this more likely to be a durable good or a non-durable good?

Solutions

Expert Solution

Answer : a) P = $50

By putting the value of P in short-run demand function we get,

Q = 100 - (0.5 * 50)

=> Q = 75

Price elasticity of demand (Ep) = (Q / P) * (P / Q)

=> Ep = - 0.5 * (50 / 75)

=> Ep = - 0.5 * 0.7

=> Ep = - 0.4

Therefore, in short-run the price elasticity of demand is - 0.4 .

b) By putting the value of P in long-run demand function we get,

Q = 120 - (0.6 * 50)

=> Q = 90

Price elasticity of demand (Ep) = (Q / P) * (P / Q)

=> Ep = - 0.6 * (50 / 90)

=> Ep = - 0.6 * 0.6

=> Ep = - 0.4

Therefore. in long-run the price elasticity of demand is - 0.4 .

c) When the price elasticity of demand is less than 1 then the demand is less elastic or inelastic. Here in both short-run and long-run the price elasticity of demand is less than 1. This means that the demand is inelastic for the good. In case of non-durable good the demand is less elastic in short-run in compared to durable good. Therefore, here the good is more likely non-durable good.

Rahul Sunny answered 1 year ago

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