Question

ACTIVITY Using the standard method, calculate the price elasticity of demand (ed) when the price of wheat rises from $20 to $26 per bushel and the quantity purchased falls from 9,000 to 7,000 bushels. Does your answer suggest to you that the demand is elastic or inelastic?! Using the standard method, calculate the price elasticity of demand (ed) when the price of wheat decreases from $26 to $20 per bushel and the quantity purchased rises from 7,000 to 9,000 bushels. Does your answer indicate to you that the demand is elastic or inelastic? Now use the midpoint method to redo the above exercises, what is the new price elasticity of demand for each? Do they show that the demand is elastic or inelastic?

Answer 1

A) E = Percentage change in demand/Percentage change in price

= [7000-9000/9000] / [26-20/20]

= [-2000/9000]/[6/20]

= -0.2222/0.3

= -0.74

The demand is inelastic

B) E = [9000-7000/7000] / [20-26/26]

= [2000/7000] / [-6/26]

= [0.2857/-0.2307

= -1.23

The demand is elastic, the value of the ealsticity would be the same in both the cases

C) Using midpoint method, E = [Q2-Q1/(Q2+Q1/2)] / [P2-P1/(P2+P1/2)]

= [7000-9000/(7000+9000/2)] / [26-20/(26+20/2)]

= [-2000/8000] / [6/23]

= -0.25/0.2608

= -0.95

The demand is inelastic