Question

Suppose the demand curve for a product is given by Q = 10 − 2P + PS, where P is the price of the product and PS is the price of a substitute good. The price of the substitute good is $2.00

Answer 1

Suppose the demand curve for a product is given by Q = 10 − 2P + PS, where P is the price of the product and PS is the price of a substitute good. The price of the substitute good is $2.00. Suppose P =$1.00. What is the price elasticity of demand?

$Q = 10 - 2P + P_s \\ \frac{dQ}{dP} = -2 \\ P = 1 \\ P_s = 2 \\ Q = 10 - 2 \times 1 + 2 \\ Q = 10 \; units$

Price elasticity of demand $= \frac{dQ}{dP} \times \frac{P}{Q} = -2 \times \frac{1}{10} = -0.2$

Price elasticity of demand = -0.2