Question

A firm's demand equation is given by Qd= 60 - 60P + 2Y, where Qd is quantity, P is price, and Y is income. If the price equals $3 and income equals $100, then price elasticity of demand will be _______

A) 160.0

B) 80.0

C) 4.0

D) 2.25

E) 0.4

Answer 1

Answer - Firm's demand equation is given by Qd = 60 - 60P + 2Y, Where 'P' is price and 'Y' is income. Price is equal to $3 and income equals to $100. Place this value into demand equation in order to calculate 'Qd'.

Qd = 60 - 60*3 + 2(100)

Qd = 60 - 180 + 200

Qd = 80 units

Now differentiate demand function with respect to price 'P'

Qd / P = ( 60 - 60P + 2Y) / P

Qd / P = -60

We know that,

Elasticity of demand is = (Qd / P) * (P/Qd)

Elasticity of demand = -60*(3/80)

Elasticity of demand = -2.25

Negative sign indicates direction of change. The price elasticity of demand is -2.25

Option D is the correct answer.