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

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Extensions of Demand and Supply Analysis 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. Price elasticity of demand is determined by comparing 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 See the graph accompanying the answer to 18-3. Elasticities, 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. See the graph. Total revenue data, top to bottom: \$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.

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

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