Question

1. A cut in price from Br.1.50 to Br.1.20 leads demand for a product rise by 10%. What would the price elasticity of demand be for this product? Interpret the result by identifying the type of good?

Answer 1

Answer:

Inelastic good

Explanation:

Price elasticity of demand ( PED) is calculated as follows

P.E.D  =   % change in Quantity Demanded

               % change in price

=1.50 - 1.20 = 0.30

=$0.30/$1.50  x 100

=$0.2 x 100

=20%

The elasticity of demand

= 10%/20%

=0.5%

This good has an inelastic demand. The priced elasticity of demand is less than one. The demand is inelastic. A 20% change in price results in a smaller change in demand( 10%).