Question

Two friends – Howard and Raj – eat potato cakes for lunch every day. They both...

Two friends – Howard and Raj – eat potato cakes for lunch every day. They both arrive at the café and before looking at the price of potato cakes, Raj says: ‘I will buy $20 worth of potato cakes whereas Howard says: ‘I will buy 10 potato cakes’. Based on this information, what can we say about the price elasticity of demand for potato cakes for each person?

Select one:

a. Raj has unit elastic demand whereas Howard has perfectly inelastic demand

b. Raj has perfectly inelastic demand whereas Howard has perfectly elastic demand

c. Raj has perfectly elastic demand whereas Howard has perfectly inelastic demand

d. Raj has perfectly elastic demand whereas Howard has unit elastic demand

e. Raj has unit elastic demand whereas Howard has perfectly elastic demand

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Answer #1

It can be mentioned that for Raj, no matter whats the quantity he gets, will always buy $20 worth of potato cakes result of which the price is constant in this regard irrespective of the quantity as a result of which the demand curve is horizontal and the demand curve is horizontal for perfectly elastic demand.

In the second case for Howard, he will buy 10 potato cakes no matter what the price is as a result of which you have to understand that the quantity is same irrespective of the price with which the demand curve is vertical and the demand curve is vertical for perfectly inelastic demand

Therefore (c) is the answer to this question

Because Raj has perfectly elastic and Howard has perfectly inelastic demand

(a,b,d,e) are wrong

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