Suppose 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:
1. Compute the price elasticity of demand for paint and show your calculations.
2. Decide whether the demand for paint is elastic, unitary elastic, or inelastic.
3. Explain your reasoning and interpret your results.
The formula for Price Elasticity of Demand (PeD) is:
PeD = (Percentage change in Demand) / (Percentage change in Price)
Percentage change in Demand= (Current demand - Old demand/ (Old demand)
Percentage change in Price = (Current price - Old Price) / (Old price)
Old price of paint: $3
New price: $3.50
Old demand for paint: 35 gallons
New demand for paint: 20 gallons
Substituting the values in the ...