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    Determining the Price Elasticity

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    Question: You are a painter, and the price of a gallon of paint increases from $3.00 a gallon to $3.50 a gallon. Your usage of paint drops from 35 gallons a month to 20 gallons a month. Perform the following:

    - Compute the price elasticity of demand for paint and show your calculations.
    - Decide whether the demand for paint is elastic, unitary elastic, or inelastic.
    - Explain your reasoning and interpret your results.

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    Solution Preview

    (a) Price elasticity of demand =|[2(q1 - q0)/(q1 + q0)] / [2(p1 - p0)/(p1 + p0)]|
    = |[2(20 - 35)/(20 + 35)] / [2(3.5 - 3)/(3.5 + 3)]
    = |-3.54|
    = 3.54

    (b) Since the price elasticity of demand > 1, the demand is price elastic.

    (c) ...

    Solution Summary

    A complete, neat and step-by-step solution is provided. Calculations for price elasticity are provided and an explanation for the type of elasticity found and a definition for price elasticity is discussed in approximately 150 words.