Question

In: Economics

Consider the following demand curve: A B C D E F G H I J P...

Consider the following demand curve:

	A	B	C	D	E	F	G	H	I	J
P	$0.50	$0.45	$0.40	$0.35	$0.30	$0.25	$0.20	$0.15	$0.10	$0.05
Q_D	1	2	4	6	9	12	16	20	25	30

Calculate elasticities for pairs of points to check statements that were made during class and in the text. When making the calculations, use average price and average quantity for the two points. The formula for this should be in your notes. It is also in the textbook.

A. When the price is high, demand is elastic. Demonstrate this by calculating the elasticity between points A and B.

B. When the price is low, demand is inelastic. Demonstrate this by calculating the elasticity between points I and J.

Solutions

Expert Solution

(A)

Calculate elasticity between points A and B -

At point A,

P = $0.50

QD = 1

At point B,

P = $0.45

QD = 2

Change in price = $0.45 - $0.50 = -$0.05

Average Price = ($0.45 + $0.50)/2 = $0.95/2 = $0.475

% change in price = Change in price/Average price = -0.05/0.475 = -0.1053 or -10.53%

Change in quantity = 2 - 1 = 1

Average quantity = (2+1)/2 = 3/2 = 1.5

% change in quantity demanded = Change in quantity/Average quantity = 1/1.5 = 0.6667 or 66.67%

Elasticity of demand = % change in quantity demanded/% change in price = 66.67/-10.53 = 6.33

The elasticity between points A and B is -6.33

The value of elasticity is greater than 1. This indicates elastic demand.

Thus, the given statement is correct.

(B)

Calculate elasticity between points I and J -

At point I,

P = $0.10

QD = 25

At point J,

P = $0.05

QD = 30

Change in price = $0.05 - $0.10 = -$0.05

Average Price = ($0.05 + $0.10)/2 = $0.15/2 = $0.075

% change in price = Change in price/Average price = -0.05/0.075 = -0.6667 or -66.67%

Change in quantity = 30 - 25 = 5

Average quantity = (30+25)/2 = 55/2 = 27.5

% change in quantity demanded = Change in quantity/Average quantity = 5/27.5 = 0.1818 or 18.18%

Elasticity of demand = % change in quantity demanded/% change in price = 18.18/-66.67 = -0.27

The elasticity between points I and J is -0.27

The value of elasticity is less than 1. This indicates inelastic demand.

Thus, the given statement is correct.

Rahul Sunny answered 1 year ago

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