E201
Spring
2009
HOMEWORK #5
1.
Describe the basic notion of elasticity in plain English.
2.
a.
Define price elasticity of demand in words.
b.
Define price elasticity of demand mathematically.
3.
a.
If a 1% increase in price leads to a 3% decrease in quantity demanded, what is the
elasticity coefficient?
b.
If a 1% increase in price leads to a 0.5% decrease in quantity demanded, what is
the elasticity coefficient?
c.
If a 1% increase in price leads to a 1% decrease in quantity demanded, what is the
elasticity coefficient?
d.
Label the coefficients in you found in (a, b, c) above as elastic, inelastic, or unit
elastic.
4.
What is the "midpoints rule" for computing an elasticity coefficient?
5.
PRICE
QUANTITY
DEMANDED
TOTAL REVENUE
PRICE
ELASTICITY
$20
0.5
18
1.5
16
2.5
14
4
12
6
10
8
8
11
6
15
4
20
2
26
a.
Calculate total revenue for each pricequantity combination.
b.
Use the midpoint formula to calculate elasticity coefficients when price falls from
$20 to $18, from $18 to $16, from $16 to $14, etc.
c.
Is elasticity constant along this demand schedule?
Explain.
d.
For which prices is demand elastic?
Inelastic?
e.
Look at the total revenue column and note how it changes.
For what price
changes is the change in total revenue positive?
When is the change in total
revenue negative?
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 Winter '09
 STAFF
 Economics, Price Elasticity

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