ps5ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 5 - Answer Key 1) Recall the demand curve for widgets, Q D =100 – 5P. a. There are two ways to find the price and quantity at which the price elasticity of demand is equal to -1 (unit elastic). Thie first is a straightforward application of the equation for price elasticity, and the second is a clever trick (for lack of a better word.) Method 1 : Notice that the equation for price elasticity of demand (at a given point on the demand curve) is given by: e D =(% Q D )/(% P). We can rewrite this equation to give us an easier expression to work with: e D =(% Q D )/(% P)=( Q D /Q D )/( P/P) = )=( Q D / P) * (P/Q D ) = (1/slope of demand curve)*(P/Q D ) (Please excuse the ugly notation. If it helps, write this out on a piece of paper to see if more easily.) Now this last expression on the right will give us an easy way to find price elasticity of demand. All we need to know is the slope of the demand curve ( P/ Q D ), and the P and Q at which we want to know the elasticity of demand. Then to find the price elasticity, invert the slope of the demand curve, multiply it by the Price, and
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This note was uploaded on 07/28/2010 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

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ps5ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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