Question

The Demand equation for a product is given by Q=20I/P Where I is the income and P is the price. a) Write an equation for the point price elasticity. For what values of I and P is demand unitary elastic? explain b) Write an equation for the point price elasticity. For what values of I and P is the good is necessity? Explain


I need expiations to the method used in solving this question

Answer 1

Q=20I/P

a) An equation for the point price elasticity is Ed = (∆Q/Q)/(∆P/P)

If I = 1/20 P, then the demand is unitary elastic.

b) An equation for the point price elasticity is Ed = (∆Q/Q)/(∆P/P)

If I > 1/20 P, then the good is necessity.