AKPS2 - ECONOMICS 211 Answer Key for Problem Set #2 Spring...

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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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AKPS2 - ECONOMICS 211 Answer Key for Problem Set #2 Spring...

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