Question

Suppose that legalizing the use of cocaine would decrease its price by 82 percent. If the price elasticity of demand for cocaine is -2.00, what would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine? percent. (Enter a numeric response using a real number rounded to two decimal places.) Suppose instead that the price elasticity of demand for cocaine is -0.16. What would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine? percent (enter your response rounded to two decimal places) The higher the absolute value of the price elasticity of demand for cocaine, the greater the increase in cocaine use that would result from legalization

Answer 1

Answer : Price changes = - 82% = - 0.82

Price elasticity of demand = - 2 (Given)

Price elasticity of demand = % changes in quantity demanded / % changes in price

=> % changes in quantity demanded = Price elasticity of demand * % changes in price

=> % changes in quantity demanded = (- 2) * (- 0.82) = 1.64

Therefore, % change in quantity demanded is increased by 1.64 .

When price elasticity of demand = - 0.16 (Given)

% changes in quantity demanded = (- 0.16) * (- 0.82) = 0.13

Therefore, % change in quantity demanded is increased by 0.13 .

Now, from above calculations it is clear that increase in quantity demanded is greater for higher price elasticity of demand in absolute value.