Question

Demand and Supply Elasticity

Problem 1 In a local market, the monthly price of Internet access service increases from $40 per account to $52 per account, and the total quantity of monthly accounts across all Internet access providers decreases from 1,000,000 to 600,000. See pages 418 – 419.

a. Assuming other things were equal, what is the price elasticity of demand? See EXAMPLE on 419.

b. Is demand elastic, unit-elastic, or inelastic? Please explain.

c. How would you interpret the price elasticity calculated in part a? See EXAMPLE on 419.

Answer 1

b) since the absolute value of elasticity is greater than it can be considered as relatively elastic in nature

c) since the price elasticity is more than 1 can be considered that it is relatively elastic in nature and as a result of this is not a necessity good but rather luxury good and the revenue can be increased by decrease in the price