Question

If the price of a good A goes from $5 to $4 and the quantity demanded goes from 60 to 70, the price elasticity of demand is?

a. elastic (greater than 1)

b. inelastic (less than 1)

c. unitary elastic (equal to 1)

d. none of the above

Answer 1

Answer : [ B ] : Inelastic ( less than 1 )

Formula :

Price elasticity of demand = % QD / % P

= % change in Quantity / % change in price

where,     

% change in Quantity = { (Q2 - Q1) / (Q2 + Q1 / 2) } *100

= [ {( 70 - 60 ) / { ( 70 + 60 ) / 2 } ] *100

= (10 / 65 ) * 100

= 15.38

  

% change in price = ( P2 - P1 ) / ( P2 + P1 /2 ) * 100

= [ ( 4 - 5 ) / { ( 4 + 5 ) / 2 } ] * 100

  = (- 1 / 4.5 ) * 100

  = - 22.22

Price elasticity of demand = 15.38 / - 22.22

= - 0.7 0.7

= Inelastic ( < 1 )