Elasticity of demand and related concepts Given the demand curve below: 1. Calcu
ID: 1156671 • Letter: E
Question
Elasticity of demand and related concepts Given the demand curve below: 1. Calculate the price elasticity of demand between points A and B. 110 1.00 2. Would you characterize this coefficient of price elasticity as elastic or inelastc? 3. What will happen to total revenue if price is raised from $1.00 to $1.10? 020 0 10 Demand 4. Calculate the price elasticity of demand between points C and D 11 12 5. Calculate the price elasticity of demand given this data: P $50, Q 75; P $40, Q 150 6. The price of a newspaper increases by 10% and quantity demanded of newspapers falls by 10%, The demand for newspapers is: a. perfectly elastic. b. unitary elastic. c. elastic. d. inelastic. 7. As you move down a straight-line downward-sloping demand curve, the price elasticity of demand: a. becomes more elastic. b. becomes more inelastic c. remains constant because the slope is constant. d. may become more or less elastic depending on the slope of the demand curve. 8. A local candy store charges $10 per pound for hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If the owners want to increase their total revenue from the sale of chocolate, what advice will you give them? Explain.Explanation / Answer
1. Ed = -2.2
Points
Q
P
%change in Q
%change in P
Ed
A
5
1.1
B
6
1
0.20
-0.09
-2.20
2. It is elastic as Ed is greater than 1 interms of absolute value
3. TR = 1.1*5 = 5.5
4.
Points
Q
P
%change in Q
%change in P
Ed
C
11
0.2
D
12
0.1
0.09
-0.50
-0.18
5. Ed = (Q2-Q1)/Q1/(P2-P1)/P1 =((40-50)/50)/((150-75)/75) =-0.2
6. Option a. Ed = %change in Qd/%change in price = 10%/10% = 1
7. Option b, as people would not be much responsive for the price changes at low prices
8. Since the elasticity of demand is 2.5, a 10 percent reduction in price would increase the quantity sales by 25 percent.
Q
P
%change in Q
%change in P
Ed
TR
100
10
1000
125
9
0.25
0.10
2.50
1125
Points
Q
P
%change in Q
%change in P
Ed
A
5
1.1
B
6
1
0.20
-0.09
-2.20
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