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    Calculating price and elasticity of demand

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    Suppose that your demand schedule for cell phone applications is as follows:

    Quantity Demanded per Year Quantity Demanded per Year
    Price per Application (income = $40,000 per year) (income = $50,000 per year)
    $ 2 60 70
    4 52 59
    6 44 50
    8 32 42
    10 24 30

    ? Calculate the price elasticity of demand as the price of a cell phone application decreases from $6 to $4 if your income is: (i) $40,000 per year, and (ii) $50,000 per year. Is the price elasticity of demand elastic, inelastic or unitary elastic? Briefly explain

    ? Calculate the income elasticity of demand as your income increases from $40,000 to $50,000 if: (i) the price per cell phone application is $6, and (ii) the price is $8. Is the income elasticity of demand high, low or unitary? Briefly explain.

    © BrainMass Inc. brainmass.com December 24, 2021, 9:24 pm ad1c9bdddf
    https://brainmass.com/economics/demand-supply/calculating-price-elasticity-demand-374706

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    SOLUTION This solution is FREE courtesy of BrainMass!

    Please refer attached file for complete solution. Expressions typed with the help of equation writer are missing here.

    ? Calculate the price elasticity of demand as the price of a cell phone application decreases from $6 to $4 if your income is:
    (i) $40,000 per year, and

    Price elasticity of demand=

    (ii) $50,000 per year.

    Price elasticity of demand=

    Absolute value of price elasticity of demand is less than 1 in both the cases, we can say that demand is inelastic in both cases.

    Calculate the income elasticity of demand as your income increases from $40,000 to $50,000 if: (i) the price per cell phone application is $6, and (ii) the price is $8. Is the income elasticity of demand high, low or unitary? Briefly explain.

    (i) the price per cell phone application is $6

    Income elasticity of demand=

    (ii) the price is $8
    Income elasticity of demand=

    We find that income elasticity of demand is positive in both the cases, it means that cell phone is not a inferior good. It is a normal/superior good.

    At a price level of $6, income elasticity of demand is less than 1 (it is low) means that cell phone is behaving like a normal good for given change in income. Percent increase in consumption is lower than percent increase in income.

    At a price level of $8, income elasticity of demand is higher than 1 (it is high) means that cell phone is behaving like a superior good for given change in income. Percent increase in consumption is higher than percent increase in income.
    We find that at higher prices, people regard cell phone distinguishably better.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 9:24 pm ad1c9bdddf>
    https://brainmass.com/economics/demand-supply/calculating-price-elasticity-demand-374706

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