In: Economics
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%.
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%