Question

In: Economics

Consider a competitive market for which the quantities demanded and supplied​ (per year) at various prices...

Consider a competitive market for which the quantities demanded and supplied​ (per year) at various prices are given as​ follows:

Price​ (Dollars)

Demand​ (Millions)

Supply​ (Millions)

60

22

14

80

20

16

100

18

18

120

16

20

Calculate the price elasticity of demand when the price is ​$100.

The price elasticity of demand is ____

​(Enter your response rounded to two decimal places.​)

Solutions

Expert Solution

The price elasticity of demand is the responsiveness of change in quantity demanded due to a change in prices of the goods. This means that if the demand is more responsive to the change in prices, then the demand is more elastic. If the demand is less responsive to the change in prices, the demand is less elastic. It is given by the following formula:

Price elasticity of demand = % change in quantity demanded / % change in price

Price elasticity of demand at the price $100 = [(18-20)/20 *100] / [(100-80)/80 *100]

= -2/5 = - 0.4

If the value of price elasticity of demand is more than 1 then it would be called elastic demand.

If the value of price elasticity of demand is less than 1 then it would be called inelastic demand.

If the value of price elasticity of demand is equal to 1 then it would be called unitary elastic demand.

Here, the price elasticity of demand is 0.4, this means the demand is inelastic.


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