Chapter 2 Tutorial Notes

For non durable goods the demand is likely to be more

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Unformatted text preview: rable goods the demand is likely to be more elastic over a long period relative to a short period. Total Revenue, Marginal Revenue, and Price Elasticity ⁄ Then if η<-1 (elastic), And if η>-1 (inelastic), ⁄ or ⁄ , so an increase in price will reduce TR. or , so an increase in price will increase TR. Marginal Revenue (MR) – The incremental revenue earned from selling the nth unit of output. It is also the derivative of TR with respect to Q. ( ( )( )) Because price elasticity of demand implies that (Q/P)(ΔP/ΔQ)=1/η ( ( )) Since, Whether η is greater than, equal to or less than -1 depends on wherther Q is greater, equal to, or less than a/2b. Price elastic if Q<a/2b; it is of unitary elasticity if Q = a/2b and it is price inelastic if Q>a/2b Example PLOT THESE EQUATIONS Demand TR MR Total Revenue is highest when MR=0 and Demand Q = a/2b OTHER ELASTICITIES: Constant-Elasticity and Unitary Elastic Demand Function Mathematical form that always yields the same elasticity, regardless of the product’s price and the consumers’ income. An important property of this type of demand is that the price elasticity of demand equals –b1, regardless of the value of P or I. SOLUTIONS: Problem 2: a) b) Demand is elastic when η<-1 Let us find the point where the curve is unitary elastic and then we will be able to extrapolate the elastic region. c) It should charge a unitary elastic price, when MR = 0 Problem 4: a) Whether TR goes up or down when the Price is lowered depends upon whether the demand is elastic o...
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This note was uploaded on 02/24/2014 for the course MGCR 293 taught by Professor Salmasi during the Winter '08 term at McGill.

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