Quiz 2. Elasticity ANS

Quiz 2. Elasticity ANS - dP s / dQ s = a, dQ s / dP s = 1/...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 201 Shomu Banerjee ELASTICITY QUIZ ANSWERS (a) The equation for an inverse demand function is given by P d = a Q d where a > 0 is a constant. Calculate the price elasticity of demand, ε . The slope of the inverse demand is dP d dQ d = " a ( Q d ) 2 , so dQ d dP d = " ( Q d ) 2 a . Substitute into the elasticity formula " = dQ d dP d # P d Q d : = # ( Q d ) 2 a $ P d Q d = # ( Q d ) 2 a $ ( a / Q d ) Q d = -1. (b) The equation for a linear inverse supply function is given by P s = aQ s , where a > 0 is the slope of the supply curve (i.e., this inverse supply passes through the origin with slope a ). Calculate the price elasticity of supply , s . Since
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: dP s / dQ s = a, dQ s / dP s = 1/ a . Substituting in the elasticity formula, s = dQ s dP s # P s Q s = 1 a # P s Q s = 1 a # aQ s Q s = 1. (c) Show that if a linear inverse supply function has a positive vertical intercept, then it is elastic, i.e., s > 1. Hint: Write the inverse supply function as P s = aQ s + b , where b > 0 is the positive vertical intercept. Substituting in the elasticity formula, we get s = dQ s dP s # P s Q s = 1 a # ( aQ s + b ) Q s = 1 + b aQ s > 1....
View Full Document

Ask a homework question - tutors are online