Answer to Question #74460 in Microeconomics for micheal solomon

Question

Suppose demand for good A is given by DA = 500 - 10 Pa + 2 Pb + 0.70I where Pa is the
price of good A, Pb is the price of some other good B, and I is income. Assume that Pa is
currently $10, Pb is currently $5, and I is currently $100.
a. What is the elasticity of demand for good A with respect to the price of good A at the
current situation? Interpret the nature of elasticity of demand.

Answer 1

So, demand for good A is given by DA = 500 - 10 Pa + 2 Pb + 0.70I, that`s why formula of elasticity of demand for good A for price A is ((DA2 – DA1)/ DA1)/((Pa2-Pa1)/Pa1).
1) elasticity of demand for good A for price A is ((430- 480)/480)/((15 - 10)/10) = 0.21, when Pa1 is currently $10, Pa2 is currently $15 Pb is currently $5, and I is currently $100. This level of price elasticity is inelastic, so when the price of goods changes, the demand for goods A will increase not so much.