Chapter 3 Elasticity(1)

7/23/2019 Chapter 3 Elasticity(1)

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Elasticity

Fahad wahid mote

M. ArifMaha Qamar

Filza failal

Syed Asif


2/22

For each of the following cases, calculate the arcprice elasticity of demand, and state whetherdemand is elastic, inelastic or unit elastic.

A. when the price of milk increases from $.! to

$ .!" per gallon, the #uantity demanded fallsfrom "" gallons to %" gallons.

&. when the price of paper 'ack falls $(."" to $).!", the Qnty demanded rises from """ to !"

*. when the rent on apartment rises from $!""to $!!", the Qnty demanded decreases from""" to %!".


3/22

Data:+.!

+.!"

Price change=0.25

Q""

Q%"

Quantity change=10

Formula:Arc

Elasticity=[(change in

Quantity demanded-

Q/Q-01 02changein +rice-+/+-01


4/22

E2"-0""/%"-0102".!-0.!/.!"-01

E2"0%!102".!0.3(!1

E"."!0"."!

E


5/22

Data:+(

+).!"

Price change=0.5

Q""

Q!"

Quantity change=50

Formula:Arc


Quantity demanded-



6/22

E2!"-0""/!"-0102".!-0(/).!-01

E2!"0!102".!0).(!1

E".40"."(4

E 5!.4"!


7/22

Data:+!""

+!!"

Price change=50

Q"""

Q%!"

Quantity change=50

Formula:Arc


Quantity demanded-



8/22

E2!"-0"""/%!"-0102!"-0!""/!!"-01

E2!"0%(!102!"0!!1

E"."!0"."%!

E 5".!3)


9/22

a. +rice elasticity 6 unitary elasticity-

'. +rice elasticity 6!.4 elastic-

c. +rice elasticity 6".!4 inelastic-


10/22

For each of the following cases, calculatethe point price elasticity of demand andstate whether demand is elastic, inelastic,or unit elastic. 7he demand cur8e is gi8en

'y

Q9 !"""5!"+

a.7he price of the product is $!"

'.7he price of the product is $(!c.7he price of the product is $!


11/22

!olution:

Qd!"""5!"+a

+a!"""0!"""

a""

. +a!"0!"5""!"05!"5

. +a(!0(!5""(!05!53

3. +a!0!5""!05(!5".33


12/22

a. +rice elasticity 6 unitary elasticity-

'. +rice elasticity 63." elastic-

c. +rice elasticity 6".33 inelastic-


13/22

For each of the following cases, what is thee:pected impact on the total re8enue of the;rm< E:plain your reasoning

a.+rice elasticity of demand is known to 'e 5".!

and the ;rm raises price 'y " percent

'.+rice elasticity of demand is known to 'e 5.!and the ;rm lowers price 'y ! percent

c. +rice elasticity of demand is known to 'e 5."

and the ;rm raises price 'y percent

d.+rice elasticity of demand is known to 'e ", the;rm raises price 'y !" percent


14/22

a. =e8enue will rise 'ecause demand isinelastic. A " percent price increase will causethe #uantity demanded to fall 'y ! percent, 'utthat will 'e more than o>set 'y the " percent

increase in price on the units that are still sold.

&. =e8enue will rise 'ecause demand is elastic.A ! percent price decrease will cause the

#uantity demanded to rise 'y .! percent, andthat will more than o>set the lower price on theoriginal units.


15/22

*. =e8enues will not change. &ecauseelasticity is 6, a percent increase in pricewill result in a percent decrease in #uantitydemanded, and thus re8enue will not change.

d. =e8enues will rise. &ecause demand isperfectly inelastic, there will 'e no change inthe #uantity demanded when price increases,and, thus, re8enues will increase.


16/22

a. PX = 250 1/2Q

TR = PQ = (250 1/2Q)Q = 250Q 1/2Q^2


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19/22

c. At Q = 250, MR = 0, and, thus, revenue ismaximied! "t that #$int, P = %125, and,thus,

TR = %&1,250!

d. 7he midpoint of the demand cur8e is at Q

= 250, P= %125! "'$ve that #$int, demandis elastic, and 'elow that point, demand isinelastic.


20/22

7he +rice Elasticity of demand is ." 9emand is elastic and, thus, re8enues will

fall if you increase the price and rise if youlower it-.

7he income Elasticity of demand is .!?our good is a normal good and is income

elastic or a lu:ury good-.


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7he cross price Elasticity of 9emand is'etween your good and related good is 53.!

7he related good is a complement 'ecausea rise in the price of the other good causesa decrease in demand for your product@ thegoods are fairly strong complements, as thedemand for your product is elastic withrespect to the price of the other good.


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9emand is inelastic and, thus, re8enues willrise if you increase the price and fall if youlower it-. ?our good is a normal good and isincome inelastic or a necessity good-. 7he

related good is a su'stitute 'ecause a rise inthe price of the other good causes anincrease in demand for your product@ thegoods are fairly good su'stitutes as the

demand for your product is elastic withrespect to the price of the other good.

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Chapter 3 Elasticity(1)