Variables given: Output = 20,000 Price = $10 Fixed costs = $60,000 AVC = $6 (a 1
ID: 1253472 • Letter: V
Question
Variables given:Output = 20,000
Price = $10
Fixed costs = $60,000
AVC = $6 (a 10 % decrease output decreases AVC to $5.40)
Arc price elasticity of Demand is -2.0
Solution given:
%?P = -.05 = (P2 - 10)/((P2 + 10)/2)
P2 = 9.51
%?Q = .10 = (Q2 - 20,000)/((Q2 + 20,000)/2)
Q2 = 22,100
Question:
Can you walk me through the math on this? When I calculate a 5% decrease in price I get 9.50 ($10 x -5%) and for Q2 (20,000 x .10) = 22,000. I assume the % change in Q is a 10% increase given the Elasticity of Demand x the 5% decrease in price. What am I missing in calculating the P2 and Q2?
Thanks.
Explanation / Answer
the minute error is creeping in because the calculation you are doing is directly taking the percentage on the earlier P and Q rather than finding the P2 and Q2 through the delta method 2(x-y)/(x+y)= 5/100 gives 200x-200y= 5x+5y x= 205/195 y = 1.051 y intead of the 1.05 y you use in the first method :) Hope that helped.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.