Question

The EFMP is a vehicle incentive program in California that provides subsidies to low- and middle-income households to scrap their old vehicles for more fuel efficient vehicles.Researchers found that a $1,000 subsidy which decreased prices by roughly 7.3% increased sales of eligible fuel-efficient vehicles by about 28%. What is the implied elasticity of demand? Is demand elastic or inelastic?

Answer 1

% change in price = -7.3

% change in demand = 28.

Price elasticity of demand (ed) = % change in demand / % change in price.

ed = 28 / (-7.3)

ed = -3.83

The absolute value of elasticity of demand is 3.83, which is greater than 1. It implies demand is elastic.