Question

Problem 6: Suppose that your demand schedule for DVDs is as follows: Price Quantity Demanded Income = Rs. 20000 Quantity Demanded Income = Rs. 24000 Rs. 18 80 DVDs 100 DVDs 20 70 90 24 55 60 28 35 40 32 24 28 a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from Rs.24 to Rs.28 if (i) your income is Rs.20000 and (ii) your income is Rs.24000. b. Calculate your income elasticity of demand as your income increases from Rs. 20,000 to $24,000 if (i) the price is Rs.18 and (ii) the price is Rs.20.

Answer 1

The price elasticity of demand for DVDs, as the price increases from Rs. 24 to Rs. 28, is -2.18 when the income is Rs. 20000 and -2 when the income is Rs. 24000.

Step-by-step explanation:

To calculate the price elasticity of demand using the midpoint method, we use the formula:

Price elasticity of demand = (% change in quantity demanded) / (% change in price)

Let's calculate the price elasticity of demand as the price of DVDs increases from Rs. 24 to Rs. 28:

1. For an income of Rs. 20000:
   Quantity demanded changes from 55 DVDs to 35 DVDs, which is a decrease of 20 DVDs, or -36.36%.
   Price changes from Rs. 24 to Rs. 28, which is an increase of Rs. 4, or 16.67%.
   Using the formula, the price elasticity of demand is calculated as -36.36% / 16.67% = -2.18.
2. For an income of Rs. 24000:
   Quantity demanded changes from 60 DVDs to 40 DVDs, which is a decrease of 20 DVDs, or -33.33%.
   Price changes from Rs. 24 to Rs. 28, which is an increase of Rs. 4, or 16.67%.
   Using the formula, the price elasticity of demand is calculated as -33.33% / 16.67% = -2.

Therefore, the price elasticity of demand for DVDs as the price increases from Rs. 24 to Rs. 28 is -2.18 when the income is Rs. 20000, and -2 when the income is Rs. 24000.