Little Miss Muffet spends $100 every month on curds and whey, regardless of price. What is the elasticity of demand? A. 1 B. 0 C. 100 D. Infinity
I think it must be D.
It’s B… necessities are inelastic
I’d go with A. Since she is spending $100 (fixed) so her % change in quantity demanded must go down by exactly the % increase in price. thus the elasticity of deman should be 1.
yeah I think you’re right delhi, I take it back. If she always bought a certain quantity then PEOD would equal 0, which is what I was thinking initially.
But let’s use some numbers. At an initial price per unit of $1.00, she would buy 100 units. If price increases by 100% to $2.00, she would buy 50 units, which is a decrease in quantity of 50%.
But you have to use the average increase/decrease rule… Quantity decreases to 50, so that’s an average decrease of 50/((100+50)/2)=50/75=66.66% Price increases 1/((1+2)/2)=66.66% So using those rules it works out like Delhi said.
Oops, forgot about that! Thanks.
A it is
Yup, the answer to this deceptively innocent-looking problem is A, elasticity of unity. I got it wrong when I first saw it as well. Simplest proof is defining q=100/p where p and q are price and quantity respectively. elasticity = |(p/q)*(dq/dp)| = |-1| = 1
you guys are good…
Good job, your guys! It got me thinking too. I think the thing to watch out for in these types of questions is whether the amount the individual is spending is fixed. Usually when we talk about elasticity we assume that the $$ we spend on a good/service is not fixed, and that changes the whole story. good question, stratus. thanks for posting.