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Problem Set 2Sol

Problem Set 2Sol - 1 ECONOMICS 100 NOTES ON PROBLEM...

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1 ECONOMICS 100 NOTES ON PROBLEM SET #2 (Elasticity; Market Interventions) 1. Elasticity 1.1 Calculating Elasticity Consider the demand schedule given by the equation: p = 10 – 1q, and the points A (p = \$8; q = 2) and B (p= \$6 and q = 4). The diagram below shows this. Now calculate the point elasticity at A, and the arc elasticity between A and B. P 10 A (\$8, 2) B (\$6, 4) 10 Q 1.1 Arc Elasticity: Between A and B: ? q = 2 Avg q = 3 ? q = -2 Avg p = 7 For Arc Elasticity, use mid-point formula to compute % changes: Arc Price Elasticity of Demand = - % ? q / % ? p = - [2/3 / -2/7] = 7/3 Point Elasticity of Demand: Point Elasticity of Demand = - [ ? q / ? p] * p/q At point A: p = 8; q = 2. [ ? q / ? p] = run / rise or 1/slope of D = -1. So, E D = - (-1) * 8/2 = 4

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