Question

Katie’s demand for chocolate bars is perfectly inelastic at a quantity of one per week. Maximiliano will consume three chocolate bars per week when the price is 1
, and he will consume four per week when the price is .5
. Katie and Maximiliano are the only consumers of chocolate bars. Which of the following best describes the price elasticity of market demand beginning at the price of
.5 and ending at the price of
1?


Perfectly inelastic

Option A,Perfectly inelastic

a

Inelastic

Option B,Inelastic

b

Unit elastic

Option C,Unit elastic

c

Elastic

Option D,Elastic

d

Perfectly elastic

Answer 1

Market quantity at P = 0.5 is 1 (Katie) + 4 (Maximiliano) = 5.
At P = 1 it is 1 + 3 = 4.

Using the midpoint (arc) elasticity:
%ΔQ = (4 − 5) / ((4 + 5)/2) = −1 / 4.5 = −0.2222
%ΔP = (1 − 0.5) / ((1 + 0.5)/2) = 0.5 / 0.75 = 0.6667
Elasticity = %ΔQ / %ΔP = −0.2222 / 0.6667 ≈ −0.333

|Elasticity| < 1, so market demand is inelastic. (Option B)