Question

2- The quantity demanded of good (Y) increased from (3) units to (8) units, due to the decrease in the price of This item from (15) riyals to (6) riyals.
- Required: Find the price elasticity of demand for good Y

Answer 1

Price elasticity of demand is calculated using the following formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
First, calculate the percentage change in quantity demanded:
% Change in Quantity Demanded = ((New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded) x 100
% Change in Quantity Demanded = ((8 - 3) / 3) x 100
% Change in Quantity Demanded = (5 / 3) x 100
% Change in Quantity Demanded = 166.67%
Next, calculate the percentage change in price:
% Change in Price = ((New Price - Old Price) / Old Price) x 100
% Change in Price = ((6 - 15) / 15) x 100
% Change in Price = (-9 / 15) x 100
% Change in Price = -60%
Now, plug the percentage changes into the price elasticity of demand formula:
Price Elasticity of Demand = (166.67 / -60)
Price Elasticity of Demand = -2.778
Therefore, the price elasticity of demand for good Y is -2.778. This means that the demand for good Y is relatively elastic, indicating that a change in price leads to a larger percentage change in quantity demanded.