Question

Suppose the demand curve for a good is Q^d = 5P-12. If the good currently sells for € 4, then the price elasticity of demand is …

Answer 1

The demand curve for a good is

Qd = 5.P - 12

This is a case of Giffen goods where the demand curve is positively sloped.

Hence, from the demand function we can get,

dQd/dP = 5.........(1)

The good currently sells for €4. Putting P = €4 in the demand function we get,

Qd = 5×4 - 12

or, Qd = 8

Hence, the Price Elasticity of Demand is

Ed = (dQd/dP).(P/Qd)

or, Ed = (5)×(4/8)

or, Ed = 2.5

The price elasticity of demand is (2.5).

Hope the solution is clear to you my friend.