Lec2-Questions-Ch3-Ch4-Solutions

Lec2-Questions-Ch3-Ch4-Solutions - C41 - WEEK #2 (Ch3 &...

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C41 - WEEK #2 (Ch3 & Ch4) SOLUTIONS Review the list of important concepts listed at the end of the lecture slides to make sure you recall what these things mean and how to compute them. - Own price elasticity of demand - Cross price elasticity of demand - Residual demand curve - Consumer surplus, producer surplus, social welfare and deadweight loss - Textbook questions Ch3 : 1 & 3 – Solutions to odd numbered textbook problems appear at the end of the book. Textbook questions Ch4 : 1, 3, 5, 7 & 9 – Solutions to odd numbered textbook problems appear at the end of the book. Review of important concepts The own price elasticity of demand measures the percentage change in the quantity demanded of a good per percentage change in the price of this good. demand of elasticity price Own Q P P Q Q P = = = , ε = % change in quantity demanded per % change in the price of the good It measures the degree of price sensitivity of the demand curve. Since most demand curves are downward sloping the elasticity has a negative sign (i.e. an increase in the price of a good results in a reduction in the quantity of output demanded). The relatively steeper the demand curve the less price sensitive demand is to changes in the price (i.e. as the price changes along a steeper demand curve the quantity demanded changes by less than when price changes, by the same amount, along a relatively flatter demand curve). 1 | P a g e
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When: ε < - 1 demand is said to be elastic (i.e. Q changes by a larger percentage than P does) ε = - 1 demand is said to be unit elastic (i.e. Q changes by the same percentage P does) ε > - 1 demand is said to be inelastic (i.e. Q changes by a smaller percentage than P does) A linear demand curve has regions of each of these elasticities as we move along this curve. The marginal revenue (MR) can be related to the elasticity of demand (ε) as follows: ( 29 + = + = + = = = ε 1 1 1 P P Q Q P P P Q Q P Q Q P Q TR MR Thus for a linear demand curve the MR curve equals zero at the level of output where ε is equal to -1 (i.e. the unit elastic point). The cross price elasticity (of demand) measures the percentage change in the quantity demanded of a good (or service) per percentage change in the price of another good (or service). ) ( , , Y X Y Y X P Q Y X P or Y to respect with X of demand of elasticity price Cross Q P P Q Y X = = = = % change in quantity demanded of good X per % change in the price of good Y 2 | P a g e
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The sign of the cross price elasticity reveals whether the goods are substitutes (when the cross price elasticity is positive ), complements (when the cross price elasticity is negative ), or unrelated to each other (zero cross price elasticity). If an increase in the price of good Y causes an increase in the demand for
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Lec2-Questions-Ch3-Ch4-Solutions - C41 - WEEK #2 (Ch3 &amp;...

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