Question

In: Economics

1. If the price of a good falls by 10 percent, identify the price elasticity demand...

1. If the price of a good falls by 10 percent, identify the price elasticity demand from the following responses. Would the demand will elastic or inelastic?

a. 20 percent more is bought

b. 5 percent more is bought

Solutions

Expert Solution

Price Elasticity of Demand is the measure of the responsiveness of quantity demanded to a change in price.

Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Part a

When the price of good falls by 10%, quantity demanded increases by 20%

Elasticity of Demand = 20 / 10 = 2

Since Elasticity is greater than 2, it means demand is elastic. It means with a given percentage fall in price, there is larger percentage increase in quantity demanded and vice versa is also true.

Part b

When price of good falls by 10%, quantity demanded increases by 5%

Elasticity of Demand = 5 / 10 = 0.5

Since Elasticity is less than 1, it means demand is inelastic. This means with a given percentage fall in price there will be very less percentage increase in quantity demanded and vice versa is also true.

Note: While calculating elasticity of demand, absolute values are considered and minus sign is ignored.

Rahul Sunny answered 2 years ago
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