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McGill
Faculty of Engineering
MIME 310
Engineering Economy
Tutorials
Chapter 1.
Introduction
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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
($/unit)
Quantity demanded
(units/period)
A
7
450
B
6
750
C
5
1250
D
4
2000
E
3
3250
F
2
4750
G
1
8000
3
McGill
Faculty of Engineering
MIME 310
Engineering Economy
Tutorials
0
1
2
3
4
5
6
7
0
1000
2000
3000
4000
5000
6000
7000
8000
QUANTITY
(units/period)
PRICE
($/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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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.
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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This note was uploaded on 10/06/2009 for the course MIME 310 taught by Professor Bilido during the Summer '08 term at McGill.
 Summer '08
 Bilido

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