Question

Instructions: No credits can be earned without proper calculation and explanation. Round your numbers to one decimal place. Suppose the market demand for wine is given: P = 160 - 32º. When the price of tickets increases from 49 to 55, calculate the price elasticity of demand. Is the demand for wine price elastic? Why? Remember to apply the determinants of the price elasticity of demand in your explanation.

Answer 1

Answer:

a) When price = $49, Q = 37

49 = 160 - 3Q so, Q = 37

When price = $55, Q = 35

55 = 160 - 3Q ; So, Q = 35

b) Price elasticity of demand = % change in the quantity demanded / % change in price = -5.41/12.24 = -0.44

c) The demand for wine is not elastic (value less than 1). This is because when price increases by 12.24% the quantity falls only by 5.41%. The main reason for inelastic demand for wine is that there is no close substitute for wine.Those who value wine will not reduce wine consumption when its price increases.