1. The price elasticity of demand for imported tequila is estimated to be -0.20 over a wide interval
of prices. The federal government decides to raise import tariffs on foreign booze, causing the
price to rise by 20%. Will tequila sales rise, fall, or stay the same, and by what percentage
amount?
Solution
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
-.20=% Change in Quantity Demanded/20%
% Change in Quantity Demanded=4%
Tequila sales will fall by 4%.
Relatively Inelastic : The fourth category is relatively inelastic, in which the coefficient of
elasticity falls in the range 0 < E < 1. With relatively inelastic demand, relatively large changes
in price cause relatively small changes in quantity. Quantity is not very responsive to price. The
percentage change in quantity is less than the percentage change in price. In this case, a 20
percent change in price induces a 4% percent change in quantity demanded