Question

The inverse demand function is given by P = 2 – 0.13 Q.

What is the price elasticity of demand?

What is the price elasticity of demand when P = 1.2

Answer 1

The price elasticy of demand is

$$\epsilon=\dfrac{P}{Q}\cdot\dfrac{dQ}{dP}$$

$$P=2-0.13Q$$

$$Q=\dfrac{2-P}{0.13}$$

$$\dfrac{dQ}{dP}=-\dfrac{1}{0.13}$$

$$\epsilon=\dfrac{0.13P}{2-P}\cdot(-\dfrac{1}{0.13})$$

$$\epsilon=\dfrac{P}{P-2}$$

$P=1.2$

$$\epsilon=\dfrac{1.2}{1.2-2}=-1.5$$

$$\epsilon=-1.5$$