2. Use the formula in figure 4.7 to calculate the exact elasticity of demand in

Question

2. Use the formula in figure 4.7 to calculate the exact elasticity of demand in the following examples: Then tell if, in each case, demand is elastic, inelastic, or unitary elastic. (a) When the price of a deluxe car wash rises from $10.00 to $11.00, the number of daily customers falls from 60 to 48. (b) A dentist with 80 patients cuts his fee for a cleaning from $60.00 to $54.00 and attracts two new patients.

FORMULA: Elastic Demand
If demand is elastic, a small change in price leads to a relatively large change in the quantity demanded. Follow this demand curve from left to right.
$ 4 - $3 x 100 = 25
$4
10 – 20 x 100 = 100
10
100% = 4.0
25%
The price decreases from $4 to $3, a decrease of 25 percent.
Elasticity of demand is equal to 4.0. Elasticity is greater than 1, so demand is elastic. In this example, a small decrease in price cause a large increase in the quantity demanded.

Explanation / Answer

a) Price goes up 10% (1/10), demand goes down 20% (12/60) 20/10=2. Demand is elastic (>1). b) Price goes down 10% (6/60), demand goes up (2/80) 2.5%. Elasticity is 2.5/10= 0.25. Demand is inelastic (

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