Answer to Question #146043 in Economics of Enterprise for Ahmed

Question

Demand for Orange Juice is given as
Qd = 5000 – 2500 P + 1200 I + 650 E – 255 Ps
Suppose Income is I = Rs.500, Expectations E = 55, and Price of Ps = Rs 25.
a. Find the Demand Equation.
b. Using the demand function from part a.,
Calculate Elasticity of Demand for price range of Rs.125 and Rs.155.
c. What will be the ‘Price Elasticity of Demand’ at P = Rs.125?
d. Interpret the Elasticity of Demand calculated in (C) above.

Answer 1

a. If I = Rs.500, E = 55, Ps = Rs 25, then:

$Qd = 5000 – 2500P + 1200×500 + 650×55 – 255×25 = 634375 - 2500P.$

b. Elasticity of Demand for price range of Rs.125 and Rs.155 is:

$Ed = \frac{321875 - 246875} {125 - 155} × \frac{125 + 155} {321875 - 246875} = - 9.33.$

c. The ‘Price Elasticity of Demand’ at P = Rs.125 is:

$Ed = -2500×125/321875 = 0.97.$

d. The Demand calculated in (C) above is inelastic.