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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Suppose that your demand schedule for DVDs is as follows:

Price Quantity Demanded (income = $10,000) Quantity Demanded (income = $12,000)
$8 40 DVDs 50 DVDs
10 32 45
12 24 30
14 16 20
16 8 12
  1. a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000.
  2. b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,000 if (i) the price is $12 and (ii) the price is $16.

Subpart (a):

To determine
Calculating the price elasticity of demand.

Explanation

  1. (i) If the income is $10,000, then the price of pizza rises from $8 to $10, and the quantity demanded decreases from 40 to 32. By midpoint method, the price elasticity of demand is calculated as follows:

Price elasticity of demandIncome $20,000=QuantityPresentQuantityPreviousQuantityPresent+QuantityPrevious2PricePresentPricePreviousPricePresent+PricePrevious2=3240(32+402)108(10+82)=8(36)2(9)=0.22220.2222=1

The price elasticity of demand for pizza is -1

Subpart (b):

To determine
Calculating the income elasticity of demand.

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