Part 1 Define and graph the price elasticity of demand
1. (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?
2. (Price Elasticity and Total Revenue) Fill in the blanks for each price: quantity combination listed in the following table. Now graph this relationship, making sure to label each axis. What relationship have you depicted?
| P |
0 |
Price Elasticity |
Total Revenue |
| $9 |
1 |
|
|
| $8 |
2 |
|
|
| $7 |
3 |
|
|
| $6 |
4 |
|
|
| $5 |
5 |
|
|
| $4 |
6 |
|
|
| $3 |
7 |
|
|
| $2 |
8 |
|
|
3. (Categories of Price Elasticity of Demand)
For each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elastici y range identified.
|
|
Absolute
Value
|
Elasticity
|
Effect of
Price Increase
|
|
a
|
E0 = 2.5
|
|
|
|
b
|
Ed = 1.0
|
|
|
|
c
|
ED = ∞
|
|
|
|
d
|
ED = 0.8
|
|
|
Part 2 Identify the determinants of the price elasticity of demand
4. (Determinants of Price Elasticity) Why is the price elasticity of demand for Coca-Cola greater than the price elasticity of demand for soft drinks generally?
5. (Determinants of Price Elasticity) Would the price elasticity of demand for electricity he more elastic over a shorter or a longer period of time?
Part 3 Describe other measures of elasticity
6. (Cross-Price Elasticity) Rank the following In order of increasing (from negatiVe to positive) cross-price elasticity of demand with coffee. Explain your reasoning.
Bleach ____Tea _____ Cream_____ Cola____
7. (Income Elasticity of Demand) Calculate the income elasticity of demand for each of the following goods:
|
Quantity Demanded |
Quantity Demanded |
|
When Income |
When Income |
|
Is $10,000 |
Is $20,000 |
| Good 1 |
10 |
25 |
| Good 2 |
4 |
5 |
| Good 3 |
3 |
2 |
8. (Other Elasticity Measures) Complete each of the following sentences:
a. The income elasticity of demand measures, for a given price, the in quantity demanded divided by the income from which it resulted.
b. If a decrease in the price of one good causes a decrease in demand for another good, the two goods are
c. If the value of the cross-price elasticity of demand between two goods is approximately zero, they are considered