Question

In: Economics

For each of the following, (a) calculate the elasticity, (b) interpret your result (in terms of...

For each of the following, (a) calculate the elasticity, (b) interpret your result (in terms of whether a good is elastic/inelastic, and what the percentage change in quantity will be in response to a 1% change in price), and (c) indicate what would happen to revenues for this good if the price was increased In response to a 10% increase in price, the quantity demanded of Bubly decreased by 20% In response to a 5% decrease in price, the quantity demanded of steak increased by 60% In response to a 10% increase in price, the quantity demanded did not change. Part 2: Figure out how much the quantity demanded changed for each of the following: When the price elasticity of demand is 3, and the price increases by 10%. When the price elasticity of demand is 0, and the price increases by 10%. When the price elasticity of demand is 0.3, and the price increases by 10%.

Solutions

Expert Solution

The formula for price elasticity of demand:-

E = Percentage change in demand/Percentage change in price

Part 1:

1) E for Bubly = -20%/10% = -2

The good has elastic demand curve because the price elasticity is greater than one and 1% change in price will cause the demand to decrease by 2%

Since the demand is elastic,an increase in price will cause the revenue to decrease

2) E for steak = 60%/-5% = -12

The good has elastic price elasticity and 1% change in price will cause the demand to increase by 12%

Since the demand is elastic, an increase in price will cause the revenue to decrease

3) E = 0/10% = 0

The good has perfectly inelastic demand curve as the elasticity is equal to 0 so 1% change in price will not cause the demand to change.

Since the demand is perfectly inelastic so an increase in price will cause the revenue to increase

Part 2:

1) QD/10% = 3

So, QD = 10*3 = 30%

2) QD/10% = 0

QD = 0%

3) QD/10% = 0.3

QD = 10*0.3 = 3%


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