Question

 [5 Marks]

e) What would be the Price Elasticity of Demand for tickets from Lusaka to Livingstone if the price rises again from 250 kwacha to 300 kwacha? [5 Marks]

f) Explain why the answer in part d) and part e) are different.

Answer 1

e.

The demand equation given in the question is Qd ​=2000−5P

We can calculate the change in quantity demanded using the equation

When P = 250 $Q_{d}$ = 2000- 5(250)

$Q_{d}$ = 750 ($Q_{1}$ )

When P = 300 $Q_{d}$ = 2000- 5(300)

$Q_{d}$ = 500 ($Q_{2} ​$ )

Price elasticity of demand $=\frac{\frac{(Q_2-Q_1)}{(Q_1+Q_2)/2}}{\frac{(P_2-P_1)}{(P_2+P_1)/2}}$

Where

$Q_{1}$ = 750

$Q_{2}$ = 500

$P_{1}$ = 250

$P_{2}$ = 300

PED = $=\frac{\frac{(500- 750)}{(750+500)/2}}{\frac{(300-250)}{(300+250)/2}}$

PED = -2.2

f.

From question part d the PED was -1.3 therefore PED was elastic as the absolute value of elasticity was more than 1. (1.3>1).

In this part e the elasticity is -2.2. The absolute value is 2.2 which greaters than 1. The difference is that the elasticity of demand in part e is more than the one in part d in absolute terms.

The difference has been necessitated by a huge increase in part e which is way above the increase that was experienced in part d.