Suppose that house prices increase by 10%, and the total quantity of homes purchased decreases by 8%. What is the elasticity of demand of housing? Interpret your answer in the context of a 1% change in home prices?

Is the answer just -0.8? Can someone explain this please, my professor really sucks.


Yes, the answer is -0.8.

Price Elasticity of Demand is defined as: $$e_{\langle p \rangle} = \frac{\mathrm{d} Q/Q}{\mathrm{d} P/P}$$

You're given : $$\mathrm{d} Q/Q = -0.08$$ and $$\mathrm{d} P/P = 0.1$$

ergo: $$-0.08/0.1 = -0.8$$

I'm reasonably certain that by "Interpret your answer," your professor means that s/he wants you to explain what that number means, in layman's terms.

You can always check the Wikipedia entry.


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