Answer to Question #227396 in Macroeconomics for King k

Question

Given the demand function P = 20 – 5Q, find the price elasticity of demand when price of the commodity is 5 Birr per unit. Mention if the demand is price elastic or inelastic at this point

Answer 1

Price elasticity of demand

$=\frac{Q_2-Q_1}{\frac {Q_2+Q_1}{2}} \times100$

$=\frac {3-3.8}{\frac {3+3.8}{2}}\times100$

$=-23.53$

$\frac {P_2-P_1}{\frac {P_2+P_1}{2}}\times 100$

$\frac {5-1}{\frac {5+1}{2}}\times100 =133.33$

$\therefore$ Price elasticity of demand

$=\frac {-23.53}{133.33}$

$=0.18$

The price elasticity of demand is inelastic.