Question

Suppose two groups of consumers have the following demand for music concert tickets. Price $150 $200 $250 $300 Group A Quantity Demanded 2,100 2,000 1,900 1.800 Group B Quantity Demanded 1,000 800 600 400 a. As the price of tickets rises from $250 to $300, what is the price elasticity of demand for (i) group A and for (ii) group B? (Use the mid-point method in your calculation) b. Why might group A consumers have different elasticity from group B? Explain. Using supply and demand diagram, give a brief explanation about the effect of COVID-19 pandemic on the following market: a. medical/surgical mask b. cinema movie ticket c. manufacture product such as electrical component

Answer 1

a)

Group A:

P1 = 250     Q1 = 1900

P2 = 300     Q2 = 1800

PED = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

        = (1800 - 1900) / (300 - 250) * (250 + 300) / (1900 + 1800)

        = (-100 / 50) * (550 / 3700)

        = -55,000 / 185,000

       = - 0.3

The absolute value of PED is 0.3. Since PED is less than 1, the demand for the good is inelastic.

Group B:

P1 = 250     Q1 = 600

P2 = 300     Q2 = 400

PED = (Q2 - Q1) / (P2 - P1) * (P1 + P2) / (Q1 + Q2)

        = (400 - 600) / (300 - 250) * (250 + 300) / (600 + 400)

        = (-200 / 50) * (550 / 1000)

        = -110,000 / 50,000

       = - 2.2

The absolute value of PED is 2.2. Since PED is greater than 1, the demand for the good is elastic.

b) For group A consumers, Music concert is a necessary good due to which demand for music concert is inelastic. On the other hand, for group B consumers, Music concert is a luxury good due to which demand for music concert is elastic.