Question

In: Economics

If Linda's income decreases by 15% and her expenditure on DVDs increases by 10%, Linda's price...

If Linda's income decreases by 15% and her expenditure on DVDs increases by 10%, Linda's price elasticity of demand for DVDs is:
A. inelastic
B. positive
C. cannot be determined from the information given
D. unit elastic
E. highly responsive

Pl explain why the selected answer is correct and also explain in one-two line why other answers are incorrect.

Expert Solution

Since income elasticity measures the effect of change in the income of the consumers on the demand for the goods.

Income elasticity of demand of X = % change in the quantity demand of good X/ % change in the Income.

Hence it means that income elasticity refers to percentage change in quantity demanded divided by the percentage change in the income.

Since the elasticity of demand can be defined as the measurement of the degree of the responsiveness of the quantity demand due to the change in the price level.

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

If Ed is greater than 1, then the demand is elastic.

If Ed is less than 1, then the demand is elastic.

If Ed is equal to 1, then the demand is unit elastic.

If Ed is equal to 0, then the demand is perfectly inelastic.

If Ed is infinity, then the demand is perfectly elastic.

Hence when Linda's income decreases by 15% and her expenditure on DVDs increases by 10%,

Linda's price elasticity of demand for DVDs is=% change in the quantity demand/ % change in the price

For calculating price elasticity of demand % change in the quantity demand and % change in the price are required but only % change in the quantity demand given and % change in the price is not given.

Hence with the given information it cannot be determined the price elasticity of demand.

When price elasticity of demand cannot be determined, then it is not possible to tell about the nature of elasticity and degree of elasticity.

Hence it cannot be determined demand is inelastic, unit elastic and highly responsive.

Since demand shows inverse relation, so elasticity of demand cannot be positive.

Hence only option C is the correct answer.

Rahul Sunny answered 1 year ago

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