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hw03key - BINGHAMTON UNIVERSITY Department of Economics...

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BINGHAMTON UNIVERSITY Department of Economics Principles of Microeconomics (Econ 160B) Homework #3 Answer Key 1. Suppose that the price of a pound of potatoes increases from $0.75 to $0.90 and quantity demanded falls from 10,000 pounds to 8,000 pounds. Use the initial value formula to calculate the price elasticity of demand. % change in quantity demanded = [10,000-8,000]/[10,000]= [2,000]/[10,000]=20. % change in price = [$0.90 - $0.75]/[$0.75] = [$0.15]/ [($0.75] = 20. Price elasticity of demand = [20]/[20] = 1. 2. Suppose that you're the manager of a firm and your goal is to maximize your firm’s sales. You notice that when you raised your price from $10 to $11, sales fell from 500 to 400. Should you raise your price more? No. In fact, you should lower your price. At this price, the elasticity of demand is 2, so you're operating on the elastic portion of your demand curve. Here, it is the decrease in price that will result in increased sales. 3. Hotdogs are very cheap at the grocery store – about $2 for a package of 8, or 25 cents each. At a baseball game they cost $4 each. Use the concept of price elasticity of demand to explain why.
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