Slides for 07Dec.pptx

# Slides for 07Dec.pptx - Elasticity Recap Practice questions...

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Elasticity Recap/ Practice questions

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2 Price Elasticity of Demand This is the key formula you should use: E = (∆Q/ Q) / (∆P/ P) where: E = Price elasticity of demand ∆Q = Change in quantity (New quantity – Old quantity) Q = Old quantity ∆P = Change in price (New price – Old price) P = Old price
3 #1 Your firm sells product Gamma. The own price elasticity of Gamma is -0.5. The price of Gamma is \$20 and the quantity sold of Gamma is 100. Suppose the price of Gamma is raised to \$30. What is the new quantity sold of Gamma? Here: E = -0.5 ∆Q = X (to be determined) Q = 100 ∆P = \$10 (i.e. \$30-\$20) P = \$20 OR -0.5 = (X/100) / (10/20) OR X = -25 (solve for yourself) ∆Q = -25 OR (New quantity – Old quantity) = -25 OR (New quantity – 100) = -25 OR New quantity = 75 (solve for yourself) If the price of Gamma is raised to \$30, the new quantity sold of Gamma is 75 . OWN PRICE ELASTICITY

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More formally.. #1 Your firm sells product Gamma. The own price elasticity of Gamma is -0.5. The price of Gamma is \$20 and the quantity sold of Gamma is 100. Suppose the price of Gamma is raised to \$30. What is the new quantity sold of Gamma? 25 75 125
5 #2 Your firm sells product Theta. The own price elasticity of Theta is -2. The price of Theta is \$20 and the quantity sold of Theta is 100. Suppose your boss tells you to increase sales of Theta to 150, by changing price of Theta. What should you set the new price of Theta? Here: E = -2 ∆Q = 50 (i.e.150-100) Q = 100 ∆P = X (to be determined) P = \$20 OR -2 = (50/100) / (X/20) OR X = -5 (solve for yourself) ∆P = -5 OR (New price – Old price) = -5 OR (New price – 20) = -5 OR New price = 15 (solve for yourself) If you wish to sell 150 units of Theta, you should set the price of Theta to \$ 15 .

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6 Which of the following statements is true: A. Gamma demand is elastic B. Theta demand is elastic
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