In Ozone, California, people all have the same tastes and they all like hot tubs. Nobody wants more than one hot tub but a person with wealth $W will be willing to pay up to $.01W for a hot tub. The number of people with a wealth greater than $W for any given W in Ozone is approximately . The price elasticity of demand for hot tubs in Ozone, California, is

Question

In Ozone, California, people all have the same tastes and they all like hot tubs. Nobody wants more than one hot tub but a person with wealth $W will be willing to pay up to $.01W for a hot tub. The number of people with a wealth greater than $W for any given W in Ozone is approximately  . The price elasticity of demand for hot tubs in Ozone, California, is

Quizplus · Accepted Answer

The formula for price elasticity of demand is (% change in quantity demanded) / (% change in price). Since it is given in the problem that nobody wants more than one hot tub, we can assume that the quantity demanded is always 1. Therefore, the denominator of the elasticity formula is simply the price of the hot tub.

For any given wealth level W, the maximum price a person is willing to pay for a hot tub is 0.01W. Let's say the price of a hot tub is P. Then the percentage change in price is (P - 0.01W) / P, and the percentage change in quantity demanded is (1 - 1) / 1 = 0.

Therefore, the formula for price elasticity becomes: 
0 / [(P - 0.01W) / P] = 0

This means that the price elasticity of demand is 0, which is equivalent to saying that demand is perfectly inelastic. However, since we are asked to choose from the given answer choices, the closest answer is C), -1, which is the elasticity of a constant elasticity demand curve.

In Ozone, California, People All Have the Same Tastes and They