Question

uppose that the monthly demand for housing in Egypt is QD = 1000 – 5P.

• Using the formula for elasticity we have described in class, suppose that the initial price is $500 dollars, calculate the price elasticity of demand between a price of $600 and $500.
• Explain the meaning of your answer using the concept of elasticity
• Suppose that the prevailing price is $500. Would you recommend an increase in the price to $500, why or why not? Explain using the concept of elasticity. If not, describe the conditions under which you could make such a recommendation.
• Calculate the total revenue first from the sale of houses at a price of $500 and then at a price of $600. Do you reach a different conclusion regarding the effect of the increase in price?
• Suppose that when an average customers income increases rises from $18,000 to $20,000 per year, annual housing purchases increase from 5,500 units to 6,500 units. Calculate the income elasticity of demand. Is housing a normal good? Why or why not?

note; please o need it typed not hand writing, Thank you

Answer 1

Solution:

Given, the demand equation for housing in Egypt

QD = 1000 – 5P

Initial price =  $500

Price elasticity of demand =

When the price is $500, quantity demanded = 1000 - (5x500)

= 1000 - 2500

= -1500

When the price is $600, quantity demanded = 1000 - (5x600)

= 1000 - 3000

= -2000

Price elasticity of demand =

=

=

= -1.67

This shows that the hosing is a normal good in Egypt as its price elasticity is negative. The absolute value to the price elasticity of demand is greater than one, so the demand is price elastic.

Suppose that the prevailing price is $500. We would not recommend an increase in the price to $600, as the demand for housing is elastic. For any elastic good, even a slight change in price triggers a huge change in the quantity demanded. In Egypt, it is observed that at a price of $500, the demand for housing is negative which further decreases as the price rises. In order to generate housing demand the price should fall till the quantity demanded in a positive value.

The total revenue first from the sale of houses at a price of $500 and then at a price of $600 can be calculated using the following formula:

Total revenue = Price x Quantity sold

At price $500, Total revenue = $500 x (-1500)

= -$75,0000

At price $600, Total revenue = $600 x (-2000)

= -$12,00,000

No, the conclusion regarding the increase in price remains the same as with the price increase, the total revenue of the sellars, the loss in this case, deepens further.

Suppose that when an average customers income increases rises from $18,000 to $20,000 per year, annual housing purchases increase from 5,500 units to 6,500 units. Calculate the income elasticity of demand. Is housing a normal good? Why or why not?

The income elasticity of demand for housing =

=

=

= 1.636

The Income elasticity of demand for housing is a positive value, signifying that the housing in Egypt is a normal good whereas, the value of elasticity is greater than one, implying that the demand is income elastic, for a small change in income, the housing demand will increase by a multiple of 1.6.