6. Market demand is given as QD = 250 - 0.5P. Market supply is given as...

Question

Question

Answer 1

Answer #1

As per the information provided in the question

Market demand Qd= 250-0.5P

Market supply Qs =2P

When the price P1=$385, quantity demanded (Q1) = 250-0.5(385) = 57.5 units

When the price P2=$390, quantity demanded (Q2) = 250-0.5(390) = 55 units

In the demand function, the coefficient of the price (∆Q/∆P) = -0.5

P1=$385 Q1=57.5 units

P2=$390 Q2=55 units

∆P = P2 – P1 = 390-385 =5 ∆Q=Q2-Q1 = 55-57.5 = -2.5

Price elasticity of demand = ∆Q/∆P x [{(P1+P2)/2}/{(Q1+Q2)/2}]

= (-2.5/5)[{(385+390)/2}/{(57.5+55)/2}]= -0.5(387.5/56.25)= - 3.4

Negative sign indicates that the good is a normal good

Price elasticity is > 1, so here the price elasticity is more elastic

Price elasticity of the demand for a price increase from $385 to $390 is 3.4

Answer Option (D) = 3.4

Answer 2

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