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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