Chapter 5.pdf - Consider some determinants of the price...

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  • ECO 201
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Consider some determinants of the price elasticity of demand: The availability of close substitutes Whether the good is a necessity or a luxury How broadly you define the market A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are p same, which one has the most elastic demand? Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely t demand, and which will have demand that falls in between. Categories Most Elastic In Between Least Elastic Wine Beverages Merlot
Points: 1 / 1 Open Explanation Points: 1 / 1 Open Explanation Points: 1 / 1 Open Explanation Points: 1 / 1 Open Explanation
Points: 1 / 1 Open Explanation Close Explanation Close Explanation Close Explanation < Back to Assignment
Points: 1 / 1 Close Explanation
Points: 1 / 1 Close Explanation < Back to Assignment
Points: 1 / 1 Close Explanation < Back to Assignment
Points: 1 / 1 Close Explanation The price elasticity of demand, therefore, equals the following (ignoring the negative sign): Since the percentage change in quantity is greater than the percentage change in price, the price elasticity of demand is greater than 1, and demand is elastic between points W and X. Demand is unit elastic if the price elasticity of demand is equal to 1. This occurs when the percentage change in quantity demanded is equal to the percentage change in price. Using the midpoint method, the percentage change in price between points X and Y is 33%, and the percentage change in quantity between points X and Y is -33%. Since the percentage change in price is equal to the percentage change in quantity, the price elasticity of demand is 1, and demand is (approximately) unit elastic between points X and Y. Demand is inelastic if the price elasticity of demand is less than 1. This occurs when the percentage change in quantity demanded is smaller than the percentage change in price. Using the midpoint method, the percentage change in price between points Y and Z is 86%, and the percentage change in quantity between points Y and Z is -67%. This means the price elasticity of demand equals . Since the percentage change in quantity demanded is smaller than the percentage change in price, the price elasticity of demand is less than 1, and demand is inelastic between points Y and Z. In general, demand tends to be elastic at relatively high prices, inelastic at relatively low prices, and unit elastic at prices toward the middle of the demand curve.

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