Chapter 6 Elasticity, Consumer Surplus, and Producer Surplus

Chapter 6 Elasticity, Consumer Surplus, and Producer...

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Chapter 6 - Elasticity, Consumer Surplus, and Producer Surplus Formula: 1. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is Answer: 1.37 2. If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then the price elasticity of supply is Answer: 2.25
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3. Between prices of $5.70 and $6.30: Intuition: Demand curve D1 is less elastic (relatively inelastic) than demand curve D2, which is more elastic (relatively elastic). This can be determined by observation of each demand curve. The elasticity of each is D1 = 0.58 D2 = 1.27 Determinants of Price Elasticity 1. Would demand be relatively elastic/inelastic for Pepsi? Answer: because Pepsi, a specific product, has narrowed the definition of soft drinks (more general), then we should expect Pepsi to have a relatively elastic demand compared to soft drinks in general. 2. Suppose, you want to buy a yacht. The yacht cost $150,000 and you make $175,000 a year. Given this: what could you say about your elasticity of demand? Answer: here your consumption of the yacht claims a very high percentage (86%) of your income. Even if you are willing and able to purchase the yacht, you will have a relatively elastic demand curve for the yacht. Reason: an increase in its price lowers your real purchasing power; therefore, you have less to spend on other items. Hence, you are more responsive to changes in price. 3. Gasoline reached record highs (in nominal terms) about 2 years ago. Those who needed to travel via a car needed to purchase gasoline, making demand inelastic. What should eventually happen? Answer: As time progresses, consumers move away from gas powered cars to alternative means of transportation such as buses, subways, etc. In addition, consumers bought more gas efficient vehicles. This led to a demand for gas that was more elastic. Perfectly Elastic and Inelastic Demand and Supply
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This note was uploaded on 04/04/2011 for the course ECO 2252 taught by Professor Edward during the Spring '08 term at Troy.

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Chapter 6 Elasticity, Consumer Surplus, and Producer...

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