Summer Tut CH1 Solutions

Summer Tut CH1 Solutions - McGill Faculty of Engineering...

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials Chapter 1. Introduction
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2 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 1.1 Consider the demand schedule shown to the right. Tangent Q i t t Price Quantity Demand 0 Graphical Method Must be origin Plot the demand curve and approx- imate the point elasticity at various points using the graphical method. Compare these results with the arc elasticities determined between adjacent points. E D =( Q i -Q t ) Q t P t P t Q i t ) P t P t Q t Q i t ) / Q t P Q Point Price ($/unit) Quantity demanded (units/period) A 7 450 B 6 750 C 5 1250 D 4 2000 E 3 3250 F 2 4750 G 1 8000
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3 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 0 1 2 3 4 5 6 7 0 1000 2000 3000 4000 5000 6000 7000 8000 QUANTITY (units/period) PRICE ($/unit) 4400 6100 7400 To verify, AE CD = -( (2000 - 1250) / (2000 + 1250) ) / ( (4 - 5) / (4 + 5) ) = 2.08 Likewise, AE DE = 1.67 and AE CE = 1.78 C D E At E: (7400 - 3250) / 3250 = 1.28 At C: (4400 - 1250) / 1250 = 2.52 At D: (6100 - 2000) / 2000 = 2.05
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4 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 1.2 Consider the demand function [ Q = C / P x ] in which C and x are constants. How does the elasticity vary along this demand function (hyperbola)? E D = -(dQ/dP) / (Q / P) dQ/dP = -x•C / P x+1 E D = -(-x•C / P x+1 ) (P / Q) = (x•C / P x+1 ) (P•P x / C) = x Elasticity is constant and equal to x. Note: Q = C•P x is a supply function with a constant elasticity of x.
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5 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 0 1 2 3 4 5 6 0 100 200 300 400 500 600 700 800 QUANTITY PRICE For example, consider the function Q = 600 / P x X=1 X=2 X=0.5 When x = 1, curve is rectangular hyperbola When x > 1, curve gets closer to P axis When x < 1, curve gets farther from P axis Curve always passes through Q=C, P=1
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6 McGill
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This note was uploaded on 10/06/2009 for the course MIME 310 taught by Professor Bilido during the Summer '08 term at McGill.

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Summer Tut CH1 Solutions - McGill Faculty of Engineering...

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