110_11s_SelectedQ_Ch04

110_11s_SelectedQ_Ch04 - Econ 110 Selected Questions From...

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1 Econ 110 Selected Questions From Chapter 4 - Elasticity 1 Rain spoils the strawberry crop. As a result, the price rises from $4 to $6 a box and the quantity demanded decreases from 1,000 to 600 boxes a week. Over this price range, a. What is the price elasticity of demand? The price elasticity of demand is 1.25. The price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in the price. The price rises from $4 to $6 a box, a rise of $2 a box. The average price is $5 a box. So the percentage change in the price is $2 divided by $5 and then multiplied by 100, which equals 40 percent. The quantity decreases from 1,000 to 600 boxes, a decrease of 400 boxes. The average quantity is 800 boxes. So the percentage change in quantity is 400 divided by 800, which equals 50 percent. The price elasticity of demand for strawberries is 50 percent divided by 40 percent, which equals 1.25. ($2÷$5) × 100 b. Describe the demand for strawberries. The price elasticity of demand exceeds 1, so the demand for strawberries is elastic. 2. If the quantity of dental services demanded increases by 10 percent when the price of dental services falls by 10 percent, is the demand for dental services inelastic, elastic, or unit elastic? The demand for dental services is unit elastic. The price elasticity of demand for dental services equals the percentage change in the quantity of dental services demanded divided by the percentage change in the price of dental services. The price elasticity of demand is 10 percent divided by 10 percent, which equals 1. The demand is unit elastic. 3. The demand schedule for hotel rooms is given in the table. a. What happens to total revenue if the price falls from $400 to $250 a night? When the price is $400, the total revenue is equal to $400 × 50 million rooms, or $20 billion. When the price is $250, the total revenue is equal to $250 × 80 million rooms, or $20 billion. So the total revenue does not change when the price falls from $400 to $250 a night. b. What happens to total revenue if the price falls from $250 to $200 a night? When the price is $250, the total revenue is equal to $250 × 80 million rooms, or $20 billion. When the price is $200, the total revenue is equal to $200 × 100 million rooms, or $20 billion. So the total revenue does not change when the price falls from $400 to $250 a night. Price (dollars per night) Quantity demanded (millions of rooms per night) 200 100 250 80 400 50 500 40 800 25 1,000 20
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2 c. At what price is total revenue at a maximum? Explain and interpret your answer. The total revenue is the same at all prices, $20 billion. Because a change in price does not change the total revenue at any price, the demand is unit elastic at all prices. d.
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This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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110_11s_SelectedQ_Ch04 - Econ 110 Selected Questions From...

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