53-maths_for_PED_hints_and_answers

53-maths_for_PED_hints_and_answers - you set p=0 and then...

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Hints, tips and answers – the mathematics of price elasticity of demand 1. The symbol (delta) means ‘change in’. A % change is calculated by (change/original). So, for (% q) we can write ( q/q) and for (% p) we can write ( p/p). 2. a. To answer this question, you need to know the standard form for a linear equation of y=mx + c, where c is the y-intercept and m is the slope of the line. So, an alternative way of expressing this is to say that the slope is –b. b. From 2a we know that –b = q/ p, so substitute this into formula b. You can also substitute in (a – bp) for q (from the linear equation for the demand curve). This gives you the required formula! 3. The easiest way to do this question is to look at what value you get for the PED when
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Unformatted text preview: you set p=0 and then set q=o. When p=0, then PED is perfectly inelastic i.e. 0, and when q = o then PED is perfectly elastic i.e. ∞ 4. a. R new = (p + ∆ p) (q + ∆ q) = pq + p ∆ q + q ∆ p + ∆ p ∆ q We can essentially ignore the last term here ( ∆ p ∆ q) as it is two small numbers that are multiplied together, which gives an incredibly small and insignificant number. This also makes the following calculations much easier! b. ∆ R = R new – R = (pq + p ∆ q + q ∆ p) – pq = p ∆ q + q ∆ p c. TO calculate the rate of change in revenue when price changes, you need to divide the formula in part 4b by ∆ p, which gives p ∆ q/ ∆ p + q...
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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