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Economics - Price Elasticity of Demand

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1. A rise in the price of a certain commodity from $15 to $20 reduces quantity demanded from 20,000 to 5,000 units. Calculate the own-price elasticity of demand and state whether the demand for this product is elastic or inelastic. If each nit costs $10 to produce, was this a wise move for the company's profit position? Why?

2. If the price elasticity of demand for gasoline is 0.3, and the current price is $1.20 per gallon, what rise in the price of gasoline (in cents or dollars) will reduce its consumption by 10%? Please explain.

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Solution Summary

Both the questions have been solved in step-by-step detail regarding the price elasticity of demand for products and gasoline.

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(1) Price Elasticity of demand =|[2(q1 - q0)/(q1 + q0)] / [2(p1 - p0)/(p1 + p0)]|
= |[2(5000 - 20000)/(5000 + 20000)] / [2(20 -15)/(20 + 15)]|
= 4.2
Since the Price Elasticity of demand > ...

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