Concept of Elasticity Application and Problem solving: 2. A 10 percent increase

Question

Concept of Elasticity Application and Problem solving: 2. A 10 percent increase in the price of a good has led t o a 2 percent decrease in the quantity demanded of that good. 1. How would you describe the demand for this good? 2. Are substitutes for this good easy to find or does it have poor substitutes? 3. Is this good more likely to be a necessity or a luxury? Why? 4. Calculate the price elasticity of demand for this good. 5. Has the total revenue from the sale of the good changed? Explain your answer. 6. This good might be which of the following goods: orange juice, bread, tooth-paste, theatre tickets, I phone, blue jeans, and super bowl tickets? Why? Page 2

Explanation / Answer

1. elasticity=(% change in quantity/% change in price)

Here price elasticity of demand=2/10=0.2. Which is less than one. That is demand for this good is inelastic. Demand is not much responsive to the change in price.

2. As demand is inelastic, people buy this good even after increase it's price at a high rate. That is the substitute of this good is not easy to find.

3. As demand is inelastic, consumers have to buy this good even after the increase in price. So this good is a necessary good.

4. Price elasticity of demand= 2/10=0.2

5. Yes, total revenue will be changed as the price is increased at a higher rate than that of quantity so total revenue will be increased under inelastic demand.

6. Toothpaste is a necessary good and has no perfect substitute. People have to buy toothpaste even after an increase in the price of that good.

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