Answer to Question #54196 in Microeconomics for Asif

Question

The Demand equation for a product is given by
Q=20I/P
Where I is the income and P is the price.

a) Write an equation for the point price elasticity. For what values of I and P is demand unitary elastic? explain
b) Write an equation for the point price elasticity. For what values of I and P is the good is necessity? Explain

Answer 1

Q=20I/P
a) An equation for the point price elasticity is Ed = (∆Q/Q)/(∆P/P)
If I = 1/20 P, then the demand is unitary elastic.
b) An equation for the point price elasticity is Ed = (∆Q/Q)/(∆P/P)
If I > 1/20 P, then the good is necessity.