ec-13 - E201 Spring 2009 HOMEWORK #5 ANSWERS 1. Describe...

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E201 Spring 2009 HOMEWORK #5 ANSWERS 1. Describe the basic notion of elasticity in plain English. How responsive one thing is to a change in another. 2. a. Define price elasticity of demand in words. The responsiveness of consumption to a change in price. b. Define price elasticity of demand mathematically. (% Δ Q) ( % Δ P) 3. a. If a 1% increase in price leads to a 3% decrease in quantity demanded, what is the elasticity coefficient? 3; elastic b. If a 1% increase in price leads to a 0.5% decrease in quantity demanded, what is the elasticity coefficient? 0.5; inelastic c. If a 1% increase in price leads to a 1% decrease in quantity demanded, what is the elasticity coefficient? 1.0; unit elastic 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?
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5. PRICE QUANTITY DEMANDED TOTAL REVENUE PRICE ELASTICITY $20 0.5 $10 -- 18 1.5 27 9.5 16 2.5 40 4.25 14 4 56 3.46 12 6 72 2.6 10 8 80 1.57 8 11 88 1.42 6 15 90 1.08 4 20 80 0.71 2 26 52 0.39 a. Calculate total revenue for each price-quantity 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. No. As price falls, elasticity of demand becomes less elastic (or more inelastic). d. For which prices is demand elastic? Inelastic? Elastic price range: $6-$20. Inelastic price range: $2-$4. 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? Prices $6-$20 (elastic range) show a positive revenue change; prices $2-$4 (inelastic range) show a negative revenue change. 6. Define total revenue. Show total revenue on a supply-and-demand diagram. How is total revenue of sellers related to total expenditure by consumers? Total revenue is price times quantity sold. TR = P x Q Total expenditure (TE) is also equal to TR. Q P S D P O Q O
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7. Suppose your demand schedule for compact discs is the following: Quantity Demanded Quantity Demanded Price (Income = $10,000) (Income = $12,000) $ 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12 a. Us the midpoint method to calculate your price elasticity of demand as the price of CDs rises from $8 to $10 if (1) your income is $10,000, and (2) if your income is $12,000. If income is $10,000 and price rises from $8 to $10, price elasticity of demand
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This note was uploaded on 04/19/2011 for the course ECON 200 taught by Professor Staff during the Winter '09 term at Indiana.

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ec-13 - E201 Spring 2009 HOMEWORK #5 ANSWERS 1. Describe...

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