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    Eco 4

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    SamidhaSingh
    Sandhya's demand is unitarily elastic, as the total amount she spends on pizza ($600) does not change with price. Manhar's demand is perfectly inelastic, as he will always buy 2 pizzas regardless of price changes. Sandhya's demand can be represented by a hyperbola where price x quantity = $600. Manhar's demand is represented by a vertical line where quantity demanded is always 2 pizzas.

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    Eco 4

    Uploaded by

    SamidhaSingh
    105 views5 pages
    Sandhya's demand is unitarily elastic, as the total amount she spends on pizza ($600) does not change with price. Manhar's demand is perfectly inelastic, as he will always buy 2 pizzas regardless of price changes. Sandhya's demand can be represented by a hyperbola where price x quantity = $600. Manhar's demand is represented by a vertical line where quantity demanded is always 2 pizzas.

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    economics 4

    Original Title

    eco4

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    Sandhya's demand is unitarily elastic, as the total amount she spends on pizza ($600) does not change with price. Manhar's demand is perfectly inelastic, as he will always buy 2 pizzas regardless of price changes. Sandhya's demand can be represented by a hyperbola where price x quantity = $600. Manhar's demand is represented by a vertical line where quantity demanded is always 2 pizzas.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    105 views5 pages

    Eco 4

    Uploaded by

    SamidhaSingh
    Sandhya's demand is unitarily elastic, as the total amount she spends on pizza ($600) does not change with price. Manhar's demand is perfectly inelastic, as he will always buy 2 pizzas regardless of price changes. Sandhya's demand can be represented by a hyperbola where price x quantity = $600. Manhar's demand is represented by a vertical line where quantity demanded is always 2 pizzas.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 5

    eco4

    Suppose Sandhya and Manhar are 2 individuals


    Problem 3 considering ordering pizza, and you do not observe their
    individual demand curves. However, you overhear a
    conversation between them in which Sandhya says that
    she is going to spend 600 Rupees on pizza, no matter
    what the price of each pizza. To this Manhar responds
    that he doesn’t care about the price either and is going
    to order exactly 2 pizzas. Based on this conversation,
    what can you conclude about Manhar’s and Sandhya’s
    price elasticity of demand for home delivered pizza? (In
    case you need to make an assumption in order to
    proceed, assume that pizza is perfectly divisible)
    Solution 3
    Elasticity is the % change in quantity demanded due to a % change in price.
    Ed=(ΔQ/ΔP)(P/Q)

    Case 1: Sandhya:  Price per Quantity of Pizzas


    No matter what is the price of a pizza, she will buy Pizza worth pizza (P) (Q) PxQ
    600/-, assuming that the pizza is perfectly divisible and can be
    delivered in any quantity. 600 1 600
    Since the change in price of a pizza does not effect the 300 2 600
    amount spent on Pizza purchase, the demand is of Unitary 150 4 600
    Elasticity.
    100 6 600
    Referring to the table on the right:  10 60 600
    • If price per Pizza is 600, Sandhya will buy 1 Pizza.  1 600 600
    • If it is reduced to 300, Sandhya will by 2 Pizzas.
    0.1 6000 600
    • If the price is increased to 1200, Sandhya will buy only half
    a Pizza. 1200 0.5 600
    The product of price per pizza and quantity of pizzas ordered 6000 0.1 600
    will remain constant.
    Solution 3
    (Case 1 Continued)
    For plotting the demand curve: Extrapolating this further for all the real values of price per pizza on the cartesian plane, we
    get an equation of Hyperbola:
    PQ=600

    Ed=(ΔQ/ΔP)(P/Q)
    = (dq/dp)(P/Q)

    Q=600/P
    dq/dp=(-600)/P^2

    Ed=(-600/P^2)*(P/(600/P))
    =(-600/P^2)*(P^2/600)
    =-1

    Ed=1 (taking absolute value)


    Solution 3
    Case 2: Manhar
    No matter what is the price of a pizza, he will buy
    exactly 2 Pizzas.
    • Let’s say we increase the price of Pizza by ΔP,
    Manhar will still buy 2 Pizzas.
    • If we decrease the price of the Pizza by ΔP, Manhar
    will still buy 2 Pizzas.
    Infact for any price change of the Pizza, Manhar will be
    buying 2 Pizzas only i.e. the quantity demanded will
    remain constant irrespective of the price. 
    This can be represented on the demand curve using
    a straight line parallel to the Price axis (Y-axis).
    Q=2
    This is the case where the customers do not respond to the change in price. Even if we increase the price
    or decrease the price, the quantity demanded will remain same. This is a case of a Perfectly Inelastic
    Demand i.e. E=0

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