Question

Assume economists have determined that the price elasticity of demand for housing in a given range of the demand curve is -1.75. Suppose that the price of housing increases by 10 percent.

• Given the value of price elasticity of demand, is demand for housing elastic or inelastic in the given range of the demand curve?
• What happens to quantity demanded of housing (what is the percentage change in the quantity demanded of housing) as price of housing increases by 10%?
• As price of housing increases by 10%, does total expenditure (spending) on housing increase or decrease? Please explain your answers.

Answer 1

PED = - 1.75

Percentage change in Price = 10 %

Price Elasticity of Demand = %age change in Quantity Demanded / %age change in Price

-1.75 = %age change in Quantity demanded / 10%

%age change in Quantity demanded = -17.5 %

Given the value of Price Elasticity of demand, the demand for housing is highly elastic (PED > 1)

With the change in Price at 10 % the Quantity demanded of Housing falls by 17.5 %

As demand for housing is higly elastic, the spending on housing decreases by 17.5% with 10 % increase in the price of Housing