Question

Suppose demand and supply have constant elasticity equal to -4 and 4 respectively. When the demand decreases by 4%, we will expect the equilibrium price to fall by [Answer]% and equilibrium quantity to fall by [Answer]%. (In decimal numbers, with two decimal places, please.)

Answer #1

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percentage change in equilibrium price = percentage change in
demand / E_{s} + E_{d}

Price elasticity of demand is usually a negative number. We will take absolute value only and

ignore negative sign.

elasticity of demand = 4

elasticity of supply = 4

percentage change in the equilibrium price = – 4% / (4 + 4)

= – 4% / 8

= – 0.5%

percentage change in equilibrium quantity =

percentage change in the equilibrium price * elasticity of supply

Percentage change in equilibrium quantity = – 0.5% * 4

= – 2%

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