Elasticity

Fahad wahid mote

M. Arif
Maha Qamar
Filza failal
Syed Asif

For each of the following cases, calculate the arc

price elasticity of demand, and state whether
demand is elastic, inelastic or unit elastic.
A. when the price of milk increases from $2.25 to
$ 2.50 per gallon, the quantity demanded falls
from 100 gallons to 90 gallons.
B. when the price of paper back falls $7.00 to $
6.50, the Qnty demanded rises from 1000 to 150
C. when the rent on apartment rises from $500
to $550, the Qnty demanded decreases from
1000 to 950.

Data:

Formula:

P1=2.25
P2=2.50
Price change=0.25
Q1=100
Q2=90
Quantity change=10

Arc
Elasticity=[(change in
Quantity demanded)/
(Q1+Q2)/2] /[(change
in Price)/(P1+P2)/2]

E=[(10)/(100+90)/2]/[(0.25)/(2.25+2.50)/2]

E=[10/95]/[0.25/2.375]
E=0.105/0.105
E=1

Data:

Formula:

P1=7
P2=6.50
Price change=0.5
Q1=100
Q2=150
Quantity change=50

Arc
Elasticity=[(change in
Quantity demanded)/
(Q1+Q2)/2] /[(change
in Price)/(P1+P2)/2]

E=[(50)/(100+150)/2]/[(0.5)/(7+6.5)/2]

E=[50/125]/[0.5/6.75]
E=0.4/0.074
E= -5.405

Data:

Formula:

P1=500
P2=550
Price change=50
Q1=1000
Q2=950
Quantity change=50

Arc
Elasticity=[(change in
Quantity demanded)/
(Q1+Q2)/2] /[(change
in Price)/(P1+P2)/2]

E=[(50)/(1000+950)/2]/[(50)/(500+550)/2]

E=[50/975]/[50/525]
E=0.051/0.095
E= -0.536

a. Price elasticity = 1 (unitary elasticity)

b. Price elasticity = 5.4 (elastic)

c. Price elasticity = 0.54 (inelastic)

For each of the following cases, calculate

the point price elasticity of demand and
state whether demand is elastic, inelastic,
or unit elastic. The demand curve is given
by
QD =5000-50P
a. The price of the product is $50
b. The price of the product is $75
c. The price of the product is $25

Solution:
Qd=5000-50Pa
Pa=5000/50=100
a=100
1. Pa=50/50-100=50/-50=-1

2.

Pa=75/75-100=75/-25=-3

3.

Pa=25/25-100=25/-75=-0.33

a. Price elasticity = 1 (unitary elasticity)

b. Price elasticity = 3.0 (elastic)

c. Price elasticity = 0.33 (inelastic)

For each of the following cases, what is the

expected impact on the total revenue of the
firm? Explain your reasoning
a. Price elasticity of demand is known to be -0.5
and the firm raises price by 10 percent
b. Price elasticity of demand is known to be -2.5
and the firm lowers price by 5 percent
c. Price elasticity of demand is known to be -1.0
and the firm raises price by 1 percent
d. Price elasticity of demand is known to be 0, the
firm raises price by 50 percent

a. Revenue will rise because demand is

inelastic. A 10 percent price increase will cause
the quantity demanded to fall by 5 percent, but
that will be more than offset by the 10 percent
increase in price on the units that are still sold.

B. Revenue will rise because demand is elastic.

A 5 percent price decrease will cause the
quantity demanded to rise by 12.5 percent, and
that will more than offset the lower price on the
original units.

C. Revenues will not change. Because

elasticity is 1, a 1 percent increase in price
will result in a 1 percent decrease in quantity
demanded, and thus revenue will not change.

d. Revenues will rise. Because demand is

perfectly inelastic, there will be no change in
the quantity demanded when price increases,
and, thus, revenues will increase.

a. PX = 250 1/2Q

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

c. At Q = 250, MR = 0, and, thus, revenue is

maximized. At that point, P = $125, and,
thus,

TR = $31,250.

d. The midpoint of the demand curve is at Q

= 250, P= $125. Above that point, demand
is elastic, and below that point, demand is
inelastic.

The Price Elasticity of demand is 2.0

Demand is elastic (and, thus, revenues will
fall if you increase the price and rise if you
lower it).
The income Elasticity of demand is 1.5
Your good is a normal good and is income
elastic (or a luxury good).

The cross price Elasticity of Demand is

between your good and related good is -3.5
The related good is a complement because
a rise in the price of the other good causes
a decrease in demand for your product; the
goods are fairly strong complements, as the
demand for your product is elastic with
respect to the price of the other good.

Demand is inelastic (and, thus, revenues will

rise if you increase the price and fall if you
lower it). Your good is a normal good and is
income inelastic (or a necessity good). The
related good is a substitute because a rise in
the price of the other good causes an
increase in demand for your product; the
goods are fairly good substitutes as the
demand for your product is elastic with
respect to the price of the other good.