Answer :
Final answer:
To compute the price elasticity of demand for Teff, we calculate the percentage changes in quantity demanded and price and then divide the former by the latter. The elasticity is found to be -1.8, suggesting that demand for Teff is elastic and quite responsive to price changes.
Explanation:
The question asks us to compute the price elasticity of demand for Teff for Derartu, when the price changes from birr20 per kilo to birr25 per kilo, and the quantity demanded changes from 60 kilos to 40 kilos. To calculate the price elasticity of demand, we use the formula:
Percentage change in quantity demanded = [(change in quantity) / (average quantity)] × 100
Percentage change in price = [(change in price) / (average price)] × 100
Elasticity = (Percentage change in quantity demanded) / (Percentage change in price)
In this case, the change in quantity is 40 kilos - 60 kilos = -20 kilos, and the average quantity is (40 + 60)/2 = 50 kilos. The change in price is birr25 - birr20 = birr5, and the average price is (birr25 + birr20)/2 = birr22.5.
Plugging in the values, we get:
Percentage change in quantity demanded = (-20/50) × 100 = -40%
Percentage change in price = (5/22.5) × 100 = 22.22%
The price elasticity of demand = -40% / 22.22% = -1.8
Since the elasticity is greater than 1 in absolute value (but negative due to the direction of demand change), the demand is considered elastic. This indicates that the quantity demanded is quite responsive to price changes.
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