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 1,000,000/W.The price elasticity of demand for hot tubs in Ozone, California, is
A)-0.1.
B)-0.01.
C)-1.
D)-0.4.
E)none of the above.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this scenario, the demand function is inversely proportional to wealth (1,000,000/W), and the willingness to pay is proportional to wealth (0.01W). This results in a unitary elasticity of -1.

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