Question

1. For each of the following cases, calculate the arcprice elasticity of demand, and state whether demandis elastic, inelastic, or unit elastic.
a. When the price of milk increases from $2.25 to$2.50 per gallon, the quantity demanded fallsfrom 100 gallons to 90 gallons.

Answer 1

Arc price elasticity of demand = % change in Q / % change in
P = [(90 - 100)/100] / [(2.50 - 2.25)/2.25] = - (1/10)/(1/9) = - 0 .9 i.e Inelastic