Question

3. In Ozone, California, people all have the same tastes and they all like hot tubs. Nobody wants more than one hot tub but a person with wealth $W will be willing to pay up to $.01W for a hot tub. The number of people with a wealth greater than $W for any given Win Ozone is approximately 1,000,000/W. The price elasticity of demand for hot tubs in Ozone, California, is a. -0.1. b. -0.01. c. -1. d. -0.4. e. none of the above.

The correct answer is -1, why?

Answer 1

Answer is option C)

as Individual demand function :

Q = number of people demanding good

= 1,000,000/W

= 10,000/.01W

.01W is price of good ( as Individual is willing to pay .01W)

Thus , Q = 10,000/.01W

.01W = Price = P

Q = 10,000/P

ln Q = ln10,000 - lnP

then price Elasticity of demand , e = dlnQ/ dlnP

= -1

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