PS3_E1_Sp03 - Problem Set #3 Bruce Brown, Economics 1...

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Problem Set #3 Bruce Brown, Economics 1 (Microeconomic Principles), SMC Students should understand how to calculate and interpret elasticities. The formula on the bottom of page 96 of the textbook may be used, but I find it easier to remember Price Elasticity of Demand as: = = = = average average D average average D D Q P P Q P P Q Q P Q price in change percentage demanded quantity in change percentage % % Note more advanced economics classes use a slightly different method to calculate “point” elasticities, rather than the “arc” elasticities we use in this class. Realize our method of calculating percent change (% ) uses average rather than “initial” values – see question # 2. 1. True or False? i) If X and Y are substitutes the cross price elasticity of demand (for good X with respect to the price of Y) must be negative. ii) If demand is inelastic a rightward shift in supply will cause a large fall in price and decrease total
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