problem set answers 6

problem set answers 6 - Dr Seiji Steimetz ECON 101 ANSWERS...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 12 A NSWERS FOR P ROBLEM S ET 4 LEARNING OBJECTIVE LEARNING OBJECTIVE 6.1 Define the price elasticity of demand and understand how to measure it. Review Questions 1.1 Price elasticity of demand = (percentage change in quantity demanded)/(percentage change in price). It isn’t measured by the slope of the demand curve because the slope depends arbitrarily on what units you are using. Slope will change by a factor of 100 if you use cents instead of dollars, for example. Or, to take another example, consider the case of six-packs of soda versus cans of soda: If the price drops by $1.00 per six-pack and this causes quantity demanded to increase by two six-packs, that is the same thing as demand going up by 12 cans. So, you could either calculate the slope as 1/2 six-packs, or you could calculate it as 1/12 cans. In addition, using percentage changes in the elasticity formula allow for meaningful comparisons of demand responsiveness between very different kinds of goods: for example, breakfast cereal versus health care. Because the slope uses physical units of quantities, such comparisons become impossible. 1.2 The price elasticity = (percentage change in quantity demanded)/(percentage change in price) = – 25%/10% = –2.5. This is elastic. 1.3 In calculating the percentage change in price and quantity, the midpoint formula divides by the average of the starting and ending values. Midpoint Formula : (Q 2 Q 1 ) Q 1 + Q 2 2 ÷ (P 2 P 1 ) P 1 + P 2 2 Percentage changes can also be calculated by using the starting or ending value without averaging, but this gives different results depending on whether the starting or ending value is used.
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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 2 of 12 1.4 A perfectly inelastic demand curve is shown by a vertical line, as shown at the bottom of Table 6-1. Such a good will have no substitutes; for example, a life-saving drug. Problems and Applications 1.5 a. 000 , 000 , 4 00 . 3 $ 00 . 2 $ 000 , 000 , 8 000 , 000 , 12 = b. 4 00 . 3 $ 00 . 2 $ 8 12 = . This is a much smaller value than in a. c. We can calculate the price elasticity using the midpoint formula as follows: Percentage change in quantity demanded = % 40 100 000 , 000 , 10 000 , 000 , 8 000 , 000 , 12 = × Percentage change in price = % 40 100 50 . 2 $ 00 . 3 $ 00 . 2 $ = × So, the price elasticity of demand = 1 % 40 % 40 = Notice that this value is significantly different than the ones calculated in a. and b.
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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 3 of 12 1.6 For D 1 : Percentage change in quantity demanded = % 7 . 66 100 45 30 60 = × Percentage change in price = % 40 100 5 . 2 $ 3 $ 2 $ = × Elasticity = 7 . 1 % 0 . 40 % 7 . 66
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This note was uploaded on 02/11/2010 for the course ECON 101 taught by Professor Steimetz during the Fall '08 term at CSU Long Beach.

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problem set answers 6 - Dr Seiji Steimetz ECON 101 ANSWERS...

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