A firm sells 5
million units of a good when price is $3.00
and 3.5
million units when price is $4.50
.
The price elasticity of demand is
Part 2
A.
elastic.
B.
perfectly inelastic.
C.
unitary elastic.
D.
inelastic.
D. inelastic.
To calculate the price elasticity of demand, we need to use the formula:
Elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in price)
First, let's determine the percentage change in quantity demanded:
Change in quantity demanded = 5 million units - 3.5 million units = 1.5 million units
Percentage change in quantity demanded = (1.5 million units / 3.5 million units) * 100 = 42.86%
Next, let's determine the percentage change in price:
Change in price = $4.50 - $3.00 = $1.50
Percentage change in price = ($1.50 / $3.00) * 100 = 50%
Now, we can calculate the price elasticity of demand:
Elasticity of demand = (42.86% / 50%) = 0.8571
Based on this value, we can classify the price elasticity of demand as:
A. elastic: Elasticity greater than 1
B. perfectly inelastic: Elasticity equals 0
C. unitary elastic: Elasticity equals 1
D. inelastic: Elasticity less than 1
Since the calculated elasticity is 0.8571, which is less than 1 but not equal to 0, the correct answer is:
D. inelastic
To determine the price elasticity of demand, we need to calculate the percentage change in quantity demanded divided by the percentage change in price.
First, let's calculate the percentage change in quantity demanded:
Quantity Change = 5 million - 3.5 million = 1.5 million
Percentage Change in Quantity Demanded = (1.5 million / 3.5 million) * 100
= 42.86%
Next, let's calculate the percentage change in price:
Price Change = $4.50 - $3.00 = $1.50
Percentage Change in Price = ($1.50 / $3.00) * 100
= 50%
Now, let's calculate the price elasticity of demand:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded / Percentage Change in Price)
= 42.86% / 50%
≈ 0.857
Since the price elasticity of demand is less than 1, it indicates inelastic demand. Therefore, the correct answer is D. inelastic.