You are a painter, and the price of a gallon of paint increases from $3.00 a gallon from 3.50 a gallon.

your usage of paint drops from 35 gallons a month to 20 gallons a month. perform the following: 1. compute the price elasticity of demand for paint and show your calculations. 2. decide whether the demand for paint is elastic, unitary elastic, or inelastic. 3. explain your reasoning and interpret results?

(a) Price elasticity of demand =|[2(q1 q0)/(q1 + q0)] / [2(p1 p0)/(p1 + p0)]| = |[2(20 - 35)/(20 + 35)] / [2(3.5 - 3)/(3.5 + 3)] = |-3.54| = 3.54 (b) Since the Price Elasticity of demand > 1, the demand is price elastic. (c) [Price elasticity of demand is a measure of the responsiveness in the quantity demanded for a good or service as a result of change in the price of the good or service. That is, it is the percentage change in the quantity demanded as per the percentage change in the price. Since the demand decreases with an increase in the price, the price-elasticity of demand is negative. But it is generally reported as an absolute value. The demand is said to be price-elastic if a small change in price results in a large change in demand.] In the present case, since the difference between 3.54 and 1 is quite large, the demand is highly price-elastic. Therefore, even a small increase in price leads to a large drop in demand.