Question

Consider the following monthly market demand: P=$50+0.1(I)-0.01Q Where I is consumer’s monthly disposable income. (a) Calculate the quantity demanded given that the current price in the market is $10 and the monthly disposable income is $1,500? (b) Given your answer from (a) and given that I=$1,500, what should be the change in P if you want to increase the demand by 10%?

Answer 1

(a) P = $10; I = $1500
So, 10 = 50 + (0.1)1500 - 0.01Q
So, 0.01Q = 50 + 150 - 10 = 190
So, Q = 190/0.01 = 19,000

(b) We find elasticity of demand (e) at these values.

So,

Now, e =

e = Percentage change in quantity demanded/Percentage change in price = -0.05
So, Percentage change in price = Percentage change in quantity demanded/(-0.05) = 10%/(-0.05) = -200%

Thus, price needs to decrease by 200% to increase the demand by 10%