Question

 Use the demand curve diagram below to answer the following question.

I. What is the own-price elasticity of demand as price increases from N$2 per unit to N$4 per unit? Use the mid-point formula in your calculation.

II. Suppose that a 2% increase in price of cabbage results in a 6% decrease in quantity demanded of cabbage. Calculate own-price elasticity of demand.

III.If own-price elasticity of demand equals 0.3 in absolute value, then what percentage change in price will result in a 6% decrease in quantity demanded?

Answer 1

The own price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. This shows the responsiveness of the quantity demanded to a change in price

(1).

As price increases from N$2 to N$4,

the quantity decreases from 12 to 8

$e=\frac{\%\space change\space in\space \space Q}{\%\space change\space in\space Q}$

$\frac{\frac{\Delta Q}{Q\times}\times100}{\frac{\Delta P}{P}\times100}=\frac{\Delta Q}{Q}\times \frac{P}{\Delta P}$

$\Delta Q=12-8=4\\\Delta P=4-2=2$

(2).

$e=\frac{\%\space change\space in\space Q}{\%\space change\space in\space P}=\frac{6\%}{2\%}=3$

(3).

$e=0.3$

$e=\frac{\%\space change\space on \space Q}{\%\space change\space in\space P}$

$0.3=\frac{6}{\%\space change\space in\space P}$

$\%\space change \space in\space P=20\%$

price will increase by 20 %