Question

9) Suppose you know that the price elasticity of demand is -2 (2 in absolute value), and you know that the price of a product increased from $20 in 2019 to $24 in 2020. What are possible values for the quantity demanded in 2019 and 2020?

Answer 1

Price elasticity of demand = %change in demand/ % change in price

So, % change in price = (24-20)/20 *100 = 20%

%change in demand = ealsticity * %change in price

% Change in demand = -2*20 = -40%

Now, let q2 for quantity in 2020 and q1 for quantity in 2019

(q2-q1)/q1 = -0.4

q2-q1 = -0.4q1

q2 = 0.6q1

Since quantity cannot be negative and in fraction. So q1 must be a multiple of 5.

Therefore combination can be (5,3) ; (10,6) ; (15,9) ; (20,12)

And q2 will be a multiple of 3.