ch2_example1 - axis. Demand is completely inelastic at the...

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Harding Enterprises has developed a new product called the Gillooly Shillelagh. The market demand for this product is given as follows: Q = 240 - 4P a. At what price is the price elasticity of demand equal to zero? b. At what price is demand infinitely elastic? c. At what price is the price elasticity of demand equal to one? d. If the shillelagh is priced at $40, what is the point price elasticity of demand? Solution: The demand curve given in this problem is linear. The intercepts of the inverse demand curve on the price and quantity axes are $60 and 240 respectively. The price elasticity of demand varies along the length of this demand curve. Demand is infinitely elastic at the intercept on the price
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Unformatted text preview: axis. Demand is completely inelastic at the intercept on the quantity axis. Demand is unit elastic at the half-way point between these two extremes. Thus, a. The price elasticity of demand equals zero (is completely inelastic) at a price of zero. b. Demand is infinitely elastic at a price of $60. c. The price elasticity of demand equals one at a price of $30. d. The price elasticity of demand equals P Q Q P ∆ ∆ . If P equals $40, Q equals 80. Q P ∆ ∆ is constant along a linear demand curve. In this case it equals -4. Therefore, the price elasticity of demand equals (40/80)(-4) = -2....
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This note was uploaded on 04/29/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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