Question

2 (20 points). Suppose that your demand schedule for compact discs is as follows:

Answer 1

Question 2

(a)

When income is $12,000, the quantity demanded decreases from 50 units to 45 units, when price decreases from $8 to $10.

So,

P1 = $8

Q1 = 50 units

P2 = $10

Q2 = 45 units

Calculate the price elasticity of demand -

Ep = -0.47

The price elasticity of demand is -0.47

(b)

At price of $16, when income increases from $10,000 to $12,000, the quantity demanded increases from 8 to 12 units.

So,

I1 = $10,000

Q1 = 8 units

I2 = $12,000

Q2 = 12 units

Calculate the Income elasticity of demand -

Ei = 2.2

Thus,

The income elasticity of demand is 2.2