Econ 331 PS1 1) Suppose that the quantity of steel demanded in France is given b
ID: 1138237 • Letter: E
Question
Econ 331 PS1 1) Suppose that the quantity of steel demanded in France is given by Q4- 100-2P +0.SY+0.2PA, where Q is the quantity of steel demanded per year, P is the market price of steel, Y is real GDP in France, and PA is the market price of aluminum. In 2011, market conditions are such that P- 10, Y-40, and PA-100. a) How much steel will be demanded in 2011? b) What is the price elasticity of demand, given market conditions in 2011? Is Demand elastic, inelastic or unitary elastic? Based on the value that you calculate, give a sentence that explains the value. Give an appropriate sentence that explains this value. For this elasticity measure, it should begin with "If price increases by 196, "Explanation / Answer
Qd = 100 - 2P + 0.5Y + 0.2Pa
Qd = 100-2*10+0.5*40+0.2*100
Qd = 120, when it is given that P = 10, Y = 40 and Pa = 100
Price Elasticity of demand
Ed = (dQ/dP)*(P/Q) = -2*(10/120) = -0.167 (partial derivative of the demand function with respect to the price multiplied by the ratio of price and quantity)
The own price elasticity of demand is inelastic. This means that if price of the good, in our case steel, rises by 1% the demand for steel will fall by 0.167%. Also if the price falls by 1% then the demand for steel will rise by 0.167%.
The alternate formula for elasticity is= % Change in qty demanded/% change in price.
0.167 = % Change in qty demanded/1 (assuming 1% change in price)
% Change in qty demanded = 0.167%
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