Question

15 pts READ EACH QUESTION CAREFULLY AND WRITE YOUR ANSWERS IN THE SPACE PROVIDED. EXPLAIN YOUR ANSWERS. FOR EACH OF THE FOLLOWING PAIRS OF GOODS, IDENTIFY WHICH GOOD HAS THE HIGHER PRICE ELASTICITY OF DEMAND. {I.E. MORE ELASTIC} INSULIN FOR A DIABETIC VS DIALYSIS TREATMENT FOR SOMEONE WITH A KIDNEY DISEASE

Answer 1

Insulin for kidney disease is less elastic.

If the good is a necessary, then the elasticity is lower.

Elasticity also depends on the duration, whether short term or long term. Gasoline is non-durable and the elasticity will be lower in the short run and higher in the long run. Because in the long run, consumers can find other alternative fuel.

Price elasticity of demand (PED)= % change in quantity demanded /% change in price of the good.

% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

1. If price increases from $2.00 (old price) to $3.00 (new price), quantity demanded decreases from 800 (old quantity) to 700 (new quantity).

Price elastic of demand

Old quantity 800     Old price $2.00

New quantity 700   New price $3.00

% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

% change in quantity demanded= ((700-800)/800)) x100

                                                         =( -100/800) x100

                                                       = -12.50%

% change in price = ((New price-old price)/old price)) x 100

                                 =((3.00-2.00) /2.00)) x100

                                 = (1.00/2.00) x 100

                                 = 50%

Price elasticity of demand = -12.50%/50%= 0.25

The sign does not matter, PED is always stated without the sign. It is inelastic since Ped is <1

Price elasticity of supply = % change in quantity supplied/% change in price

% change in quantity supplied = ((New quantity-old quantity)/old quantity)) x 100

% change in price = ((New price-old price)/old price)) x 100

If price increases from $2.00 (old price) to $3.00 (new price), quantity supplied increases from 500 (old quantity) to 1000 (new quantity).

% change in quantity supplied=(1000-500)/500=(500/500)x100=100%

% change in price = (3.00-2.00)/2.00=1.00/2.00=-0.50%

Price elasticity of supply=100%/50%= 2.00

PES is elastic as it is >1. Sign of PES does not matter.