Question

34. The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?

Answer 1

ANSWER-34)

We are given: P = 2/Q or Q = 2/P

1) EOD as price falls from 5 to 4:

When price is 5: Q = 2/P = 2/5 = 0.4

When price is 4: Q = 2/P = 2/4 = 0.5

% change in quantity: [0.5 - 0.4)/0.4] = 0.25

% change in price: [(4 - 5)/5] = -0.20

EOD = % change in quantity / % change in price = 0.25 / -0.20 = -1.25

2) EOD as price falls from 9 to 8

When price is 9: Q = 2/P = 2/9 = 0.22

When price is 8: Q = 2/P = 2/8 = 0.25

% change in quantity: [0.25 - 0.22) / 0.22] = 0.136

% change in price: [(8 - 9) / 9] = - 0.11

EOD = % change in quantity / % change in price = 0.136 / -0.11 = -1.23

We will be expecting the lower elasticity at the higher prices and not to be same in both scenarios

As per policy we have to answer first question