Question

Am I crazy or is there not enough given information to solve this??

The price elasticity of demand is a measure of how much the demand for a product is affected by a change in price. Review the following scenario and answer the questions that follow.

Evelyn makes $15,000 per year and Tami makes $150,000 per year. They are both buying roast beef at the grocery store. Evelyn asks for $10 worth of roast beef, and Tami asks for 10 pounds of roast beef.

What is each consumer’s price elasticity of demand?

Identify examples of situations that would affect the marginal utility of roast beef for each consumer. Explain how each consumer’s marginal utility of roast beef would be affected by each factor.

Answer 1

You caught it right. There is not enough information to compute price elasticity of demand!

Price elasticity = % Change in quantity demanded / % Change in price.

In the question, only one set of income is given for each consumer, which is irrelevant. We can't even compute Income elasticity using one data point. Second, quantity demanded by Evelyn is worth $10, but how much of roast beef does $10 buy? Third, what is the original and new price of roast beef? Fourth, what is the new quantity demanded of roast beef by each consumer?

However, answer to second part is as follows.

Marginal utility (MU) of roast beef for each consumer depends on:

- Consumer's share of total income that roast beef occupies. The higher the share of income, the higher the MU.

- Availability of substitute goods. The more substitutes of roast beef that are available, the lower the MU.

- Price of roast beef. Higher price increases MU.