ElasticityII_AK - ECON 200 B Practice Problems Elasticity...

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Unformatted text preview: ECON 200 B Practice Problems Elasticity Friday, April 16 th , 2010 1. Mankiw #6, Chapter 5. The accompanying table shows the demand schedule for compact discs. Price of VW Beetles Quantity demanded (when income is $10,000) Quantity demanded (when income is $12,000) $8 40 CDs 50 $10 32 CDs 45 $12 24 CDs 30 $14 16 CDs 20 $16 8 CDS 12 a) Using the midpoint method, calculate the price of elasticity of demand when the price of CDs rises from $8 to $10 (i) when income is $10, 000, (ii) when income is $12,000. The equation we will be working with for either case is given below: ?¡¢? ?£?¤¢¤ ?¥ ¦?§¨¦ = © 2 − © 1 ª / « © 2 + © 1 2 ¬ ? 2 − ? 1 ª / « ? 2 + ? 1 2 ¬ (i) When income is $10,000 we use the following points: P 1 = $8 Q 1 =40 P 2 = $10 Q 2 =32 ∆© % = © 2 − © 1 ª « © 2 + © 1 2 ¬ = 32 − 40 ª « 32 + 40 2 ¬ = − 8 36 ∆? % = ? 2 − ? 1 ª « ? 2 + ? 1 2 ¬ = 10 − 8 ª « 18 2 ¬ = 2 9 ?¡¢? ?£?¤¢¤ ?¥ ¦?§¨¦ = ­ ∆© % ∆? % ­ = ® © 2 − © 1 ª « © 2 + © 1 2 ¬ ? 2 − ? 1 ª « ? 2 + ? 1 2 ¬ ® = ¯ − 8 36 2 9 ¯ = 1 °±? ±²³± ³± ±²´µ ´¶·°¸? ³¶¹ º»´·? ·²³¶¼? ±²? ¼°°¹ ´µ ½¶´± ?¾³µ±´· . (ii) When income = $12,000 we have P 1 = $8 Q 1 =50 P 2 = $10 Q 2 =45 ∆? % = ? 2 − ? 1 ¡ ¢ ? 2 + ? 1 2 £ = 45 − 50 ¡ ¢ 45 + 50 2 £ = − 5 95 2 = − 10 95 = − 2 19 ∆? % = ? 2 − ? 1 ¡ ¢ ? 2 + ? 1 2 £ = 10 − 8 ¡ ¢ 18 2 £ = 2 9 ?¤¥? ?¦§¨¥¨ ?© ª?«¬ª = ­ ∆? % ∆? % ­ = ® ? 2 − ? 1 ¡ ¢ ? 2 + ? 1 2 £ ? 2 − ? 1 ¡ ¢ ? 2 + ? 1 2 £ ® = ¯ − 2 19 2 9 ¯ = 9 19 °±? ±²³± ³± ±²´µ ´¶·°¸? ³¶¹ º»´·? ·²³¶¼? ±²? ¼°°¹ ´µ ´¶?½³µ±´· . b) Calculate the income elasticity of demand as your income increases from $10,000 to $12,000 when (i) price is $12 , (ii) price is $10. The equation we will use for both of these problems is below: ¬¥?«? ?¦§¨¥¨ ?© ª?«¬ª = ?...
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This note was uploaded on 11/19/2010 for the course ECON ECON200 taught by Professor Ericka during the Spring '10 term at University of Washington.

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ElasticityII_AK - ECON 200 B Practice Problems Elasticity...

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