Key to Problem Set _1

# Key to Problem Set _1 - Key to Problem Set#1 2.7 Suppose...

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Key to Problem Set #1 2.7 Suppose that the U.S. demand for maple syrup, in thousands of gallons per year, is Q d =6000 – 30 P. What is the elasticity of demand at a price of \$75 per gallon? Elasticity is ( Q/ P)(P/Q). When P = 75, Q = 3,750, so E = (-30)(75/3750)= -0.60. Another way to do this is to use our little geometry trick. Invert the demand function: P = 200 –0.0333 Q. Since the price intercept is 200, the elasticity at a price of 75 is (75)/(200-75) = 0.60. 2.9 Suppose the demand function for jelly beans in Cincinnati is linear. Two years ago, the price of jelly beans was \$1 per pound, and consumers purchased 100,000 pounds of jelly beans. Last year the price was \$2, and consumers purchased 50,000 pounds of jelly beans. No other factors that might affect the demand for jelly beans changed. What was the elasticity of demand at last year’s price of \$2? At what price would the total expenditure on jelly beans have been largest? A linear demand function is given by Q
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## This note was uploaded on 06/09/2008 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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