At a price of $5, consumers buy 200 units of good X. When the price falls...
At a price of $5, consumers buy 200 units of good X. When the price falls to $4, quantity demanded increases to 250 units. We can conclude that over this range, demand is:
a. elastic.
b. unit elastic.
c. inelastic.
d. perfectly inelastic.
Homework Answers
Answer: Option b. Unit Elastic.
Explanation:
Initial Price (PI) = 5,
New Price (PN) = 4,
Initial Quantity (QI) = 200,
New Quantity (QN) = 250.
PED = ( (QN − QI) / (QN +
QI) / 2 ) / ( (PN - PI) /
(PN + PI) / 2 )
PED = ( (250 − 200) / (250 + 200) / 2) / ( (4 - 5) / (4 + 5) /
2)
PED = 0.0556 / -0.0556
PED = -1
|PED| = 1. Therefore, demand is unit elastic, which means a given
percentage change in price leads to an equal percentage change in
demand as well.
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