Worksheet Elasticity Answer 1

What is the midpoint method for calculating price elasticity of demand? How else can the price elasticity of demand be calculated? What is the advantage of the midpoint formula?

* Variable costs: Assumed from exhibit 6. It will increase the same 8% as the variable revenue.

The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.

1. When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. In this range of prices, demand for this product is ( )

Total Sales Dollars (for covering each incremental dollar of advertising) = Absolute increase in dollar sales / Advertising expense = $500,000 / $150,000 = $3.33

Elasticity of demand is measured as the percentage change in quantity demand divided by the percentage change in price .

Because the paint is at 2.56, this is considered to be elastic demand. This means that the demand for the good changes at a faster rate than the price change of the good. Sales fall off steeply when the price increases, but they jump sharply when the price declines.

2. The quantity of peanuts supplied increased from 40 tons per week to 60 tons per week when the price of peanuts increased from $4 per ton to
$5 per ton. The price elasticity of supply for peanuts over this price range is

Since each product is about 1.00 dollar then we thought that if we charge 1.75 dollars we could get a profit of 75 cents profit.

II. When price falls from 4 pounds to 3 pounds the demand for travel increases to 80,000 units- At the original market price of 4 pounds the demand for travel was 60,000 units generating revenue of 240,000 pounds. When the price is reduced to 3 pounds the resulting demand is 80,000 units and this also generates income of 240,000 pounds. When market price changes and the resulting revenue remains the same it can be said that price elasticity of demand is unitary in

To solve the equation, you plug 3000 in for x and get p(price) = 120. Yes, the unit price of $120 may seem high but because production decreased by almost half and we kept revenue the same the increase in unit price was justified. A function for the elasticity of demand would have to follow the equation E(p) = -pf’(p)/f(p). The predetermined function for f(p) = 12000-75p and taking the derivative f’(p) = -75, these can be plugged into the elasticity demand function to get E(p) = 75p/12000-75p. Using the unit price of $120 for p elasticity of demand comes out to be 3. Since 3 is greater than 1 the unit elasticity at this price is elastic. Based on this finding increasing this price would make revenue less productive and so we should keep the price of the water bottles lower to be able to produce more; however, it would make sense to increase

Profits fall by $143.75 (from $900 to $756.25). Tax revenue collected is $137.50 ($5 × 27.5 = $137.50). See Figure 11.4.

So we can see, the contribution in case of increasing price to commercial hours, leading to reducing the demand by 30% is $12211 lower than the current contribution. Hence, income would go down if we do like this way. The

8.5 cents will increase profits by 0.093 - 0.0850 = 0.0053. Sensitivity analysis also shows that up

When the price of a good rises the quality demanded falls, if we think about how much does it falls. To figure out by how much it falls we must calculate the price elasticity of demand which is calculate by how responsive demand is to rise in price. Also, the price elasticity of supply measures the responsiveness of quantity supplied to a change in price.