Chap 18 - Extensions of Demand and Supply Analysis ANSWERS...

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ANSWERS TO END-OF-CHAPTER 18 QUESTIONS 18-1 Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 “units” or 1000, 2000, 3000, 4000, 5000, 6000, 7000, and 8000 movie tickets, makes no difference in determining elasticity in Table 18.1. P r i c e e l a s t i c i t y o f d e m a n d i s d e t e r m i n e d b y c o mparing the percentage change in price and the percentage change in quantity demanded. The percentage change in quantity will remain the same regardless of whether the difference is between 1 unit and 2 units or 1000 units and 2000 units. 18-2 ( Key Question ) Graph the accompanying demand data, and then use the midpoint formula for E d to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity? Explain in a nontechnical way why demand is elastic in the northwest segment of the demand curve and inelastic in the southeast segment. Product price Quantity demanded $5 4 3 2 1 1 2 3 4 5 S e e t h e g r a p h a c c o m p a n y i n g t h e a n s w e r t o 1 8 - 3 . E l asticities, top to bottom: 3; 1.4; .714; .333. Slope does not measure elasticity. This demand curve has a constant slope of -1 (= -1/1), but elasticity declines as we move down the curve. When the initial price is high and initial quantity is low, a unit change in price is a low percentage while a unit change in quantity is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic. When the initial price is low and initial quantity is high, a unit change in price is a high percentage change while a unit change in quantity is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic. 18-3 ( Key Question ) Calculate total-revenue data from the demand schedule in question 2. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue. S e e t h e g r a p h . T o t a l r e v e n u e d a t a , t o p t o b o t t o m : $5; $8; $9; $8; $5. When demand is elastic, price and total revenue move in the opposite direction. When demand is inelastic, price and total revenue move in the same direction. 279
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This note was uploaded on 06/17/2011 for the course BUS 720 taught by Professor Na during the Summer '11 term at McMaster University.

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Chap 18 - Extensions of Demand and Supply Analysis ANSWERS...

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