# Calculating price and elasticity of demand

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.

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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.

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