Question

The inverse demand function is given by P = 2 – 0.13 Q.

What is the price elasticity of demand?

What is the price elasticity of demand when P = 1.2

Answer 1

We can find the price elasticity of demand as follows:

$$\epsilon=-\dfrac{P}{Q}\dfrac{dQ}{dP},$$ $$Q=\dfrac{2-P}{0.13}, \dfrac{dQ}{dP}=-\dfrac{1}{0.13},$$ $$\epsilon=-\dfrac{0.13P}{2-P}\cdot-(\dfrac{1}{0.13})=\dfrac{P}{2-P}.$$

The price elasticity of demand when P = 1.2 equals:

$$\epsilon=\dfrac{1.2}{2-1.2}=1.5$$