answerstopracticequestions5fall2004 - Economics 101 Fall 2004 Answer keys for practice Questions#5 1 i Elasticity =(5-4(5 4(5-6(5 6]=-1.2 or an absolute

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Economics 101 Fall 2004 Answer keys for practice Questions #5 1. i) Elasticity = [(5-4)/(5+4)]/[(5-6)/(5+6)]=-1.2 or an absolute value of 1.2. Total revenue changes = 25-24 =\$1 increase. ii) Elasticity = [(6-5)/(6+5)]/[(4-5)/(4+5)]=-9/11= -.82 or an absolute value of .82. Total revenue changes = 25-24 =\$1 increase. iii) The range of price that makes total revenue increase when price increases is when demand is inelastic which is true for prices less than \$5. The range of price that makes total revenue increase when price decreases is when demand is elastic which is true for prices greater than \$5. iv)Total revenue is maximized at the price that is unit elastic. This occurs at a price of \$5. Note that point elasticity = Q P P Q . 2. i) Before imposing tax, equilibrium price is \$5 and equilibrium quantity is 5. Then, we levy the excise tax of \$1.2 per unit. In the first market the new equilibrium price is \$5.6 and the new equilibrium quantity is 4.4. In the second market, the equilibrium price is \$5.2 and the equilibrium quantity is 4.

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