Explore BrainMass

Price Elasticity of Demand Exercise

Help me with the following elasticity exercise, using the table attached for the data.

I. The price-elasticity of demand coefficient.
Ii. The name as elastic, inelastic, unitary, perfectly elastic or perfectly inelastic.
Iii. The type of good as luxury or necessity.
Iv. The change in total revenue or total expenditure (see attachment), that is, the monetary result of subtracting tr before price change and after price change.
V. The direction of the change, also in monetary terms, that is, increasing or decreasing, and by how much?


Solution Preview

See the attached file.

The price elasticity of demand (PeD) coefficient is found by dividing the percentage change in quantity by the percentage change in price. For example, for the first row, we can find the percentage change by dividing the change in quantity by original quantity.

Thus we have: ( Q2 - Q1 ) / Q1 = 5/ 10 = 0.5 or 50%

In the same way we find the percentage change in price: ( 2 - 1) / 1 = -1/1 = - 1.0 or - 100 percent
This gives us E =%change quantity/ %change price = 50/ - 100 =- .5. Values less than one indicate inelastic demand, while values higher than one indicate ...

Solution Summary

Calculation of price elasticity of demand and determination of luxury vs necessity goods. Finding total revenue and relating this to elasticity.