Question

a) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. What is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic?

Answer 1

Given:

Initial price= 0.80 = P₀

Final price = 1.00 = P₁

Initial demand= Q₀=100

Final demand=Q₁=95

To find:

Price Elasticity (η)

Solution:

• Price Elasticity is generally negative and is given by the formula,
• Price Elasticity=  $\frac{Q_1-Q_0 / Q_1 + Q_0}{P_1- P_0/ P_1+P_0}$  
• On substituting the given values of Q1,P1,Q0,P0 we get Price elasticity as,

• P.E=  -0.02564/ 0.1111
• η= -0.2308
• Demand is said to be inelastic if it is less than 1. Hence it is Inelastic in this question.

Answer:

• The price elasticity of demand for flour is -0.2308.
• Also, the demand for flour is inelastic.