1. Consider the following demand curve for apples. Price (in dollars),10,9,8,7,6
ID: 1223320 • Letter: 1
Question
1. Consider the following demand curve for apples. Price (in dollars),10,9,8,7,6,5,4 Quantity (in Bushels), 1,2,3,4,5,6,7 a) Find the price elasticity of demand between the prices $8 and $9. Is the demand curve elastic at this point? If so, why? If not, why not? What happens to revenue if the price falls from $10 to $9? Why? b) Repeat (a) when the prices are between $5 and $4.
2. Descriptive Exercise: Consider the following pairs of goods. Discuss which of them has a higher (in absolute value) elasticity and why. a) Oil in the short run versus oil in the long run. b) Food (as a whole product) versus vacations. c) Harry Potter novels versus other fantasy novels. d) Medicine versus chewing gum.
Explanation / Answer
(1)
(a) When P = $8, Q = 3
When P = $9, Q = 2
Price elasticity of demand = % Change in Q / % Change in P
= [(2 - 3) / 3] / [$(9 - 8) / $8]
= (- 1 / 3) / (1 / 8)
= - 8 / 3
= - 2.67
Since absolute value of elasticity is higher than 1, demand is elastic.
When P = $10, Q = 1
When P = $9, Q = 2
Elasticity = [(2 - 1) / 1] / [$(9 - 10) / $10] = (1 / 1) / (- 1 / 10) = 1 / - 0.1 = - 10
Absolute value of elasticity is higher than 1, so demand is elastic. With elastic demand, as price falls, total revenue rises.
(b)
When P = $5, Q = 6
When P = $4, Q = 7
Elasticity = [(7 - 6) / 6] / [$(4 - 5) / $5] = (1 / 6) / (- 1 / 5) = - 5 / 6 = - 0.83
Since absolute value of elasticity is less than 1, demand is inelastic.
Note: First question is answered in full.
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