Question

  Given the demand function P = 20 – 5Q, find the price elasticity of demand when price of the commodity is 5 Birr per unit. Mention if the demand is price elastic or inelastic at this point

Answer 1

Solution:

Price elasticity of demand = $\frac{\triangle Q}{\triangle P} \times \frac{P}{Q}$

Demand function: P = 20 – 5Q

Derive the inverse demand function:

$Q = 4 - \frac{P}{5}$

$\frac{\triangle Q}{\triangle P} = -\frac{1}{5}$

P = 5

$Q = 4 - \frac{5}{5} = 4 - 1 = 3$

Price elasticity of demand = $- \frac{1}{5}\times \frac{5}{3}= -\frac{1}{3} = -0.33$

 

The demand is price inelastic since the value is less than one. This means that a change in price causes a smaller percentage change in demand or no effect at all.