Question

Suppose the demand function is as follows: Qd = 33 – 0.33P.

1. Derive the point elasticity when Price is $10. Interpret the result.

2. Derive the Arc Price elasticity when Price is $10. Interpret the result.

3. Discuss the comparison between the result in 1 above with the result in 2,

Answer 1

The point price elasticity is found using the following equation

When P = $ 10 , Q_d = 33 - 0.33 $ 10 = 29.7

e_p = -0.11

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When Price = $ 10 , quantity demanded = 33 - 0.33 $ 10 = 29.7 units

When Price = $ 11 , quantity demanded = 33 - 0.33 x $ 11 = 29.37 units

The arc price elasticity is found using the following equation

Arc price elasticity = -0.12

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The price elasticity of demand calculated using the Arc price elasticity is higher than the point price elasticity. This is because the point price elasticity calculates the elasticity at a specific point whereas the arc price elasticity calculates the elasticity over a range of values.