ECF1100: MICROECONOMICS
Answers to tutorial 4
Chapter 4, Problem 1
For the demand curve shown, the slope is 1; therefore (
1/slope
) is also 1. The absolute
value of the price elasticity of demand at any point on this demand curve is thus the
ratio (
P/Q
) at that point.
Point
Elasticity
A
Infinity
B
3
C
1
D
1/3
E
0
Chapter 4, Problem 2
a.
In the diagram below, I have measured quantity in 1,000 units a day to simply
calculation.
This changes elasticity calculation as well.
b
Price elasticity of demand is calculated as (
P/Q
) (
1/slope
). When P = 3, Q = 9
and (
1/slope
) is 3. So elasticity = (3/9)3 = 1.
c
If the price increases from $3.00 to $4.00, revenue will fall from $27,000 to
$24,000. (Note: between $3 and $4, demand is elastic.
Therefore an increase in
price will decrease revenue.)
d
Using the same formula as in part b, elasticity = (2/12)3 = 0.5.
e
If the price increases from $2.00 to $3.00, revenue will rise from $24,000 to
$27, 000.
(Note: demand is inelastic so the rise in price will increase revenue.)
1

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