Microeconomics - increasing the price increases total...

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Microeconomics Garret England AIU 1. At $3 per gallon, your consumption is 35 gallons for expenditure of $105 per month. At $3.50 per gallon, your consumption drops to 20 gallons for expenditure of $75 per month. In that price range, the demand is relatively elastic. Calculation of Price Elasticity of Demand: Q2 - Q1 ----------------------- ( Q1 + Q2 ) / 2 ------------------------------- P2 - P1 ----------------------- ( P1 + P2 ) / 2 20 gal - 35 gal / (35 + 20)/2 = -15 / 27.5 = -.5455 $3.50 - $3 / ($3 + $3.50)/2 = $.50 / $3.25 = .1538 -.5455 / .1538 = 3.5468 = 3.55 2. 3.55 > 1; demand is elastic When demand is elastic, increasing the price decreases total revenue. When demand is inelastic,
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Unformatted text preview: increasing the price increases total revenue. When demand is unitary elastic, changes in price don't affect total revenue. Example of unitary elastic: Basketball tickets can be priced $50, $75, $100, or $125. Research demonstrates that at $50, 3000 tickets will be sold. At $75, 2000 tickets will be sold. At $100, 1500 tickets will be sold. At $125, 1200 tickets will be sold. Total revenue at each price/ticket sales level: $50 x 3000 = $150,000 $75 x 2000 = $150,000 $100 x 1500 = $150,000 $125 x 1200 = $150,000...
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This note was uploaded on 11/07/2010 for the course MICROECONO econ220 taught by Professor Johntheodore during the Spring '10 term at AIU Online.

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