Question

1. A 20% rise in the price of chicken causes the amount of chicken you buy to fall by 20%. Your price elasticity of demand is ______.

2. A 40% fall in the price of strawberries causes the quantity demanded of strawberries to increase by 80%.

I) What is the price elasticity of demand for strawberries?

II) Is the demand for strawberries elastic or inelastic? Why?

3. Business travelers and vacationers have different price elasticities of demand for airline tickets from Jacksonville to Atlanta.

When the price of airline tickets increases by 20%, the number of tickets bought by business travelers declines by 5%, and the number of tickets bought by vacationers declines by 30%.

I) Calculate price elasticities of demand for business travelers and vacationers, respectively.

Answer 1

Price elasticity of demand measures degree of responsiveness of the quantity demanded of a commodity to a change in the price of the commodity. Price elasticity of demand is measured as-

Price elasticity of demand= percentage change in quantity demanded/ percentage change in price.

1)Given- % rise in price of chicken= 20%,. % fall in quantity demanded of chicken= 20%

Price elasticity of demand= 20%/20%

Price elasticity of demand= 1

Hence, price elasticity of demand is 1.

2)

I) Given-. % change in price of strawberries= 40% , % change in quantity demanded of strawberries= 80%

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

Price elasticity of demand= 80%/40%

Price elasticity of demand= 2

Hence, price elasticity of demand for strawberries is 2.

II) Price elasticity of demand is elastic. Price elasticity of demand is said to be elastic when percentage change in the quantity demanded of a commodity is more than percentage change in price. Here, as quantity demanded of strawberries has increased by 80% whereas percentage change in price 40%, price elasticity of demand is 2. Hence, price elasticity of demand is elastic.

3)

Price elasticity of demand for business travellers-

Given- % increase in price of airline ticket= 20%,

% fall in quantity demanded of airline tickets by business travellers= 5%

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

Price elasticity of demand= 5%/20%

Price elasticity of demand= 0.25

Hence, price elasticity of demand for business travellers is 0.25. Here, price elasticity of demand is less than 1.

Price elasticity of demand for vacationers-

Given- % increase in price of airline tickets= 20%

% fall in quantity demanded of airline tickets by vacationers= 30%

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

Price elasticity of demand= 30% / 20%

Price elasticity of demand= 1.5

Hence, price elasticity of demand for vacationers is 1.5. Here, price elasticity of demand is greater than 1.