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Calculate the price elasticity of demand.

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Demand for DVD rentals at a video store is described by the equation: Q = 4,000 - 500P, where Q denotes the number of DVDs rented per week and P is the rental price in dollars.

a) Determine the point price elasticity of demand at P = $3.00.
b) What is the new point price elasticity if price is raised to P = $4.50?
c) Comment on the change in elasticity.

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Solution Summary

The solution describes the steps to calculate price elasticity of demand at given price levels. It also analyzes the results obtained. The change in elasticity is commented on.

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a) Determine the point price elasticity of demand at P = $3.00.

Q=4000-500*P

Given, P=$3.00
Q =4000-500*3=2500

Q=4000-500P
Differentiating with respect to P, we get
dQ/dP=-500

Price elasticity ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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