For each of the following, identify where demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic:

For each of the following, identify where demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic:

(a) Price rises by 10 percent, and the quantity demanded falls by 2 percent
(b) Price falls by 5 percent, and the quantity demanded rises by 4 percent.
(c) Price falls by 6 percent, and the quantity demanded does not change.
(d) Price rises by 2 percent and the quantity demanded falls by 1 percent.

Solutions

Expert Solution

Answer : The formula of price elasticity of demand is,

Price elasticity of demand = % changes in quantity demanded / % changes in price level

1) Price elasticity of demand = - 2 / 10 = - 0.2

If the price elasticity of demand is less than 1 then the demand is inelastic. Here the price elasticity of demand is - 0.2 which is less than 1. This indicates that here the demand is inelastic.

2) Price elasticity of demand = 4 / (- 5) = - 0.8

If the price elasticity of demand is less than 1 then the demand is inelastic. Here the price elasticity of demand is - 0.8 which is less than 1. This indicates that here the demand is inelastic.

3) Price elasticity of demand = 0 / (- 6) = 0

For perfectly inelastic demand the price elasticity of demand is 0. As here the price elasticity of demand is 0 hence here the demand is perfectly inelastic.

4) Price elasticity of demand = (- 1) / 2 = - 0.5

If the price elasticity of demand is less than 1 then the demand is inelastic. Here the price elasticity of demand is - 0.5 which is less than 1. This indicates that here the demand is inelastic.

Rahul Sunny answered 1 year ago

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