chapter 3 elasticity(1)
TRANSCRIPT
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Elasticity
Fahad wahid mote
M. ArifMaha Qamar
Filza failal
Syed Asif
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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 %!".
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Data:+.!
+.!"
Price change=0.25
Q""
Q%"
Quantity change=10
Formula:Arc
Elasticity=[(change in
Quantity demanded-
Q/Q-01 02changein +rice-+/+-01
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E2"-0""/%"-0102".!-0.!/.!"-01
E2"0%!102".!0.3(!1
E"."!0"."!
E
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Data:+(
+).!"
Price change=0.5
Q""
Q!"
Quantity change=50
Formula:Arc
Elasticity=[(change in
Quantity demanded-
Q/Q-01 02changein +rice-+/+-01
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E2!"-0""/!"-0102".!-0(/).!-01
E2!"0!102".!0).(!1
E".40"."(4
E 5!.4"!
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Data:+!""
+!!"
Price change=50
Q"""
Q%!"
Quantity change=50
Formula:Arc
Elasticity=[(change in
Quantity demanded-
Q/Q-01 02changein +rice-+/+-01
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E2!"-0"""/%!"-0102!"-0!""/!!"-01
E2!"0%(!102!"0!!1
E"."!0"."%!
E 5".!3)
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a. +rice elasticity 6 unitary elasticity-
'. +rice elasticity 6!.4 elastic-
c. +rice elasticity 6".!4 inelastic-
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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 $!
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!olution:
Qd!"""5!"+a
+a!"""0!"""
a""
. +a!"0!"5""!"05!"5
. +a(!0(!5""(!05!53
3. +a!0!5""!05(!5".33
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a. +rice elasticity 6 unitary elasticity-
'. +rice elasticity 63." elastic-
c. +rice elasticity 6".33 inelastic-
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For each of the following cases, what is thee:pected impact on the total re8enue of the;rm< E:plain your reasoning
a.+rice elasticity of demand is known to 'e 5".!
and the ;rm raises price 'y " percent
'.+rice elasticity of demand is known to 'e 5.!and the ;rm lowers price 'y ! percent
c. +rice elasticity of demand is known to 'e 5."
and the ;rm raises price 'y percent
d.+rice elasticity of demand is known to 'e ", the;rm raises price 'y !" percent
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a. =e8enue will rise 'ecause demand isinelastic. A " percent price increase will causethe #uantity demanded to fall 'y ! percent, 'utthat will 'e more than o>set 'y the " percent
increase in price on the units that are still sold.
&. =e8enue will rise 'ecause demand is elastic.A ! percent price decrease will cause the
#uantity demanded to rise 'y .! percent, andthat will more than o>set the lower price on theoriginal units.
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*. =e8enues will not change. &ecauseelasticity is 6, a percent increase in pricewill result in a percent decrease in #uantitydemanded, and thus re8enue will not change.
d. =e8enues will rise. &ecause demand isperfectly inelastic, there will 'e no change inthe #uantity demanded when price increases,and, thus, re8enues will increase.
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a. PX = 250 1/2Q
TR = PQ = (250 1/2Q)Q = 250Q 1/2Q^2
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c. At Q = 250, MR = 0, and, thus, revenue ismaximied! "t that #$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.
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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.