Answer to Question #253970 in Microeconomics for tyra

Question

1)  The price has just increased from $1.50 to $3. Calculate the price elasticity of demand at $1.50. Round your answer to 2 decimal places if necessary.

 

 

 

2)   At a price of $1.50 is price elasticity of demand elastic, unit elastic or inelastic? Explain your answer.

 

 

3)   Calculate the total expenditure on lattes at price $1.50 per latte.

 

 

 

 

Answer 1

1) $e_p= \frac{dQ}{dP}$

$e_p = \frac{40- 10}{(40 + 10)/2} * 100\%/\frac{1.50 - 3.00}{(1.50 + 3.00)/2} * 100\%$

$e_p = \frac{30}{25} * 100\%/\frac{-1.50}{2.25} * 100\% = \frac{1.2}{0.66} =1.818$

2) The price elasticity of demand is elastic since the percentage change in quantity is greater than the percentage change in price and the computed elastic is greater than $1$

3) Total expenditure equals the total area under the curve and below the price of $ 1.50

$= 1.50 * 40 + \frac{1}{2} * 30*1.50 = 82.5$