Question

Question 1: The ECON3305 company was considering a price increase and wished to determine the price elasticity of demand (arc elasticity of demand). An economist and a market researcher, Sandy and you, were hired to study demand. In a controlled experiment, it was determined that at 8 cents, 100 pencils were sold while at 10 cents, 60 pencils were sold, yielding an elasticity of 2.25. However, Sandy and you were industrial spies, employed by the EF Pencil Co. and sent to ECON3305 to cause as much trouble as possible. So Sandy and you decided to change the base for their elasticity figure, measuring price in terms of dollars instead of pennies (ie., $0.08 for 8 cents and $0.10 for 10 cents). How will this sabotage affect the results? You must show all your work and explain your answer in detail to get credit. Make sure you show formula used in your answer. If you do not show the formulas used, you will receive only partial credit.

Answer 1

Let us calculate the price elasticity of demand if prices are in cents

P₁=8 cents, Q₁=100

P₂=10 cents, Q₂=60

Price elasticity of demand is given by

We can see that absolute value of price elasticity of demand is 2.25 if prices are taken in cents.

Let us calculate the price elasticity of demand if prices are in dollars

P₁=$0.08 , Q₁=100

P₂=$0.10 , Q₂=60

Price elasticity of demand is given by

We can see that absolute value of price elasticity of demand is still 2.25 if prices are taken in dollar terms. So, we can say that converting the prices from cents to dollars will not have any effect on price elasticity of demand.