Question

10. Suppose that you do not have the equations for the supply or demand curves for diesel-powered school buses, but you know that the price elasticity of demand (ϵd) is equal to -2.57 (minus 2.57) and the initial price P*=$70,000 and initial quantity Q*=80,000, what is the change in quantity (ΔQ) when the price increases by $10,000 due to a tax (show step by step calculations to get points)?

Answer 1

elasticity = (Change in Quantity / Chanage in Price)*(P/Q)

-2.57 = (Change in Quantity / Change in Price)*( 70,000)/80,000)

therefore, we have (Chnage in quantity / Chanage in Price) = -2.57*(80,000/70,000) = -2.57*(1.14285714285)

= -2.93714285712

now, Change in Qunatity(Q) =(Change in price)* (-2.93714285712) = 10,000* (-2.93714285712) = (-29371.4285712)

so the change in quantity due to increase in price by $10,000 is -29371.4285712 ( that is decreased by 29371.4285712)