Question

If the price of Pepsi-Cola increases from 40 cents to 50 cents per can and the quantity demanded decreases from 100 cans to 50 cans, then, according to the midpoint formula, the value of price elasticity of demand for Pepsi-Cola is

-1
-0.5
-0.25
-3
-2

Assume a 3% increase in income produces a 1% decline in demand. Income elasticity of demand:

3 so the good is normal
- 3 so the good is inferior
1/3 so the good has inelastic demand
-1/3 so the good is inferior

Answer 1

-3; -(1/3) inferior good

Step-by-step explanation:

Price elasticity of demand for Pepsi-Cola is as follows:

= {(50 - 100) ÷ ((50 + 100) ÷ 2)} ÷ {(50 - 40) ÷ ((50 + 40) ÷ 2)}

= -3

Given that,

Increase in income = 3%

Decline in demand = 1%

Income elasticity of demand:

= Percentage change in quantity demanded ÷ Percentage change in income

= (-1) ÷ 3

= - (1/3)

As there is a inverse relationship between the income of the consumer and the demand for a good, so this is a inferior good.