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Question

The economic advisor of a large tire store proposes the demand function D(p)=

1800p40\frac { 1800 } { p - 40 }

, where D(p) is the number of tires of one brand and size that can be sold in one day at a price p. For what prices is the demand elastic? Inelastic?

Solution

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E(p)=p40pE(p)=\dfrac{p}{40-p}

Elasticity is interpreted as the percentage change in the demand that results for every 1%1\% change in the price.

We have:

E(60)=604060=3E(60)=\dfrac{60}{40-60}=-3

So, for every 1%1\% change in the price, demand drops for 3%3\%. Since the change Δpp=626060=3.33%\dfrac{\Delta p}{p}=\dfrac{62-60}{60}=3.33\%, demand drops for 33.33%=10%-3\cdot 3.33\%=-10\%.

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