Which of the following statements about the price elasticity of demand is correct?

Explanation -

a)Elasticity of demand(PED) is defined as the responsiveness of QD(quantity demanded) to changes in price(p) of a commodity. It is defined as percentage change in QD(quantity demanded) per percentage change in price(p). Thus, price elasticity of petrol shows the percentage change in the quantity demanded of petrol which will accompany a percentage change in its price. By multiplying this amount by the total change in price of petrol, both direction and the extent of change in quantity demanded of petrol can be calculated. Hence, knowing that the price elasticity of petrol can help to figure out the responsiveness of quantity demanded of petrol to its price and the given statement is correct. Thus, this is the correct option.

b)The formula for calculating price elasticity of demand is:

E = |- (dq/q)/(dp/p)|

Where E is the elasticity of demand, q is the quantity demanded and p is the price. The minus sign implies that quantity demanded is negatively related to price. The mod sign (| |) measures the absolute value of the sensitivity of q to p. When price elasticity of X is greater than that of Y, it implies that (dqX/qX)/(dpX/pX) is greater than (dqY/qY)/(dpY/pY). Thus for a percentage change in price (dp/p = 1), dqX/x> dqY/Y. In other words, the change in quantity demanded is greater for X than for Y. hence households will be more responsive to a price change of commodity X than to Y. Hence, the given option is incorrect.

c) As mentioned in part b) above, the formula for price elasticity is:

E = |- (dq/q)/(dp/p)|

The formula not only shows the inverse relation between q and p through the minus sign, it also shows the extent of the change in q due to a change in p through (dq/q)/(dp/p). Since this value is equal to the value of E, knowing will help one know not only that the increase in price of petrol will lead to a fall in its quantity demanded, but also the exact amount by which the quantity will fall per unit change in price. Hence, the given option is incorrect.

d) As mentioned in part b) above, the formula for price elasticity is:

E = |- (dq/q)/(dp/p)|

The formula indicates that the elasticity of demand measures the sensitivity of quantity demanded to a change in price.

For dp/p % change in price, demand falls by -dq/q%.

For 1% change in price, demand falls by (-dq/q)/(dp/p)%, which is equal to E and is the definition of price elasticity.

If we need to calculate the effect of q and p, we have:\

For dq/q % change in demand, price falls by -dp/p%.

For 1% change in demand, price falls by (-dp/p)/(dq/q)%, which is equal to 1/E and is not the definition of price elasticity.

Hence, the statement that price elasticity provides us with a measure of responsiveness of price to a change in demand is incorrect. Thus, this is an incorrect option.

Thus, the correct option is option a)

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5. Use the demand diagram below to answer this question. Note that P X Q equals 33900 at every point on this demand curve. $ 180 120 90 20 30 40 50 so 120 130 INhich of the following statements correctly describes the price elasticity of demand,forthis demand curve? I. Demand is unit elastic at aprice of $60, and elastic at all prices greater than 3360. II. Demandis unit elastic at aprice of $60, andinelastic at all prices less than 3360. III. Demandis unit elastic for all prices. Possible answers: a) I and II only. b} I only. c) I, II and III. d) III only. Explain in a sentence or two how you arrived your answer. Iust picking a letter will earn you 1 point. ...

Which of the following statements correctly describes the price elasticity of demand, for this demand curve?

I. Demand is unit elastic at a price of $60, and elastic at all prices greater than $60.

II. Demand is unit elastic at a price of $60, and inelastic at all prices less than $60.

III. Demand is unit elastic for all prices.

Possible answers:

a) I and II only.

b) I only.

c) I, II, and III.

d) III only.

Explain in a sentence or two how you arrived at your answer. Just picking a letter will earn you 1 point.

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