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ECONOMICS 211
Answer Key for Problem Set #2
Spring 2007
1.
Suppose the demand for Frisbees is
P
Q
d
50
150

=
. What is the (point) price
elasticity of demand,
p
ε
at a price of
(i) $1?
(ii) $2?
(iii)
$3?
Answer
:
Recall the formula for elasticity of demand is
Q
P
Q
P
b
Q
P
P
Q
P
50

=

=
∆
∆
=
where
50
=
b
because it is the coefficient of
P
.
Let’s find the demand for different prices:
0
3
$
50
2
$
100
1
$
=
⇒
=
=
⇒
=
=
⇒
=
Q
P
Q
P
Q
P
Now we can plug in these numbers for calculating the elasticities:
For
P
= $1:
2
1
100
1
50

=

=
P
(inelastic demand)
For P = $2:
2
50
2
50

=

=
P
(elastic demand)
For P = $3:
∞
=

=
0
3
50
P
(perfectly elastic demand)
2.
Problem #4, Parkin, pg. 99.
Answer
:
a. The price elasticity of demand is 2.
When the price of a pen rises from $6 to $10, the quantity demanded of pens decreases
from 60 to 20 a day. The price elasticity of demand equals the percentage change in the
quantity demanded divided by the percentage change in the price.
The price rises from $6 to $10, an increase of $4 a pen. The average price is $8 a pen. So
the percentage change in the price equals $4 divided by $8, which equals 50 percent.
The quantity decreases from 60 to 20 pens, a decrease of 40 pens. The average quantity is
40 pens. So the percentage change in quantity equals 40 divided by 40, which equals 100
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