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If the price of Beer is $2 a bottle, Biff is willing to buy 30 bottles
If the price of Beer is $2 a bottle, Biff is willing to buy 30 bottles. If the price of Beer is $4 a bottle, Biff is willing to buy 20 bottles. What is Biff's Price Elasticity of Demand? Is his demand elastic or inelastic?
Expert Solution
Solution--
Price of beer (P1) = $2, Demand (Q1) = 30 bottles
when Price of beer (P2) = $4, Demand (Q2) = 20 bottles
Price Elasticity of demand = % Change in Quantity / % Change in Price
% Change in Quantity = ((Q2 - Q1) / ((Q2 + Q1)/2)) * 100
= ((20 -30) / (20 + 30)/2)) * 100
= (-10 / 25) * 100 = -40
% Change in Quantity = ((P2 - P1) / ((P2 + P1)/2)) * 100
= ((4 -2) / (4 + 2)/2)) * 100
= (2 / 3) * 100 = 66.67
Price Elasticity of demand = -40 / 66.67 = -0.6, which means Price Elasticity of demand is inelastic because
Inelastic = Price Elasticity of demand < 1
Elastic = Price Elasticity of demand > 1
Unitary = Price Elasticity of demand =1
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