Question

Problem​ - Elasticity of Demand​ (10 pts)

Individual consumers were observed for a month and the following table is the summary of their average purchasing patterns for bottles of​ water, slices of​ pizza, and gallons of gasoline. The prices of these goods increased during the last month and the consumers changed their consumption.

	Upper P 1P1	Upper Q 1Q1	Upper P 2P2	Upper Q 2Q2
Water	1	20	2	18
Pizza	5	12	7.50	4
Gasoline	2	100	4	95

Provide your answers to all parts of the question in the space below. Be sure to label each part of your​ answer, a-d.

a. Calculate the price elasticity of demand for​ pizza, using the midpoint formula method.

b. Calculate the price elasticity of demand for​ gasoline, using the midpoint formula method.  

c. Based on your elasticity calculations in part a and​ b, what conclusions can you make about elasticity of demand for pizza relative to​ gasoline?

d. Provide an explanation to support your conclusions in part c.   

Answer 1

a) mid point formula for Quantity= % chnge in Q= Q2 -Q1/Q2+ Q1/2 ×100

For pizza 4-12/4+12/2

=-8/16/2 ×100

= -8/8 ×100. =-100%

For Price= % chnge in price = P2-P1/P2+P1/2 ×100

=7.50-5/7.50+5/2

=2.50/12.50/2 ×100

=2.50/6.25 ×100. =40%

Price elasticity of demand for pizza = %chnge in Quantity/ % chnge in price =-100/40 =-2.5%

b) mid point formula for Gasoline

% chnge in Q= 95-100/95+100/2

=-5/195/2 ×100

=-5/97.5 ×100 = -5.128%

% chnge in P= 4-2/4+2/2

=2/6/2 ×100

2/3 ×100 =66.6%

Price elasticity of demand = -5.128/66.6

=0.076

c) The price elasticity of demand for Pizza is -2.5 whereas the Gasoline price elasticity of demand is 0.076.

Since both are below 1 so they are inelastic. However the inelasticity of pizza is higher as compared to that of Gasoline which is comparatively mild elastic.

d) The rate of increase in pizza's price is just 0.50 more than that of rate of increase in gasoline's price. Still tge inelasticity varies on a sound scale this is because gasoline is basic requirement of every household where as pizza counts under additional utility services or extra expense.