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

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 5, Problem 7PA
Textbook Problem
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Suppose that your demand schedule for pizza is as follows:

Price Quantity Demanded (income = $20,000) Quantity Demanded (income = $24,000)
$8 40 pizza 50 pizza
10 32 45
12 24 30
14 16 20
16 8 12

a. Use the midpoint method to calculate your price elasticity of demand as the price of pizza increases from $8 to $10 if (i) your income is $20,000 and (ii) your income is $24,000.

b. Calculate your income elasticity of demand as your income increases from $20,000 to $24,000 if (i) the price is $12 and (ii) the price is $16.

Subpart (a):

To determine
Price elasticity of demand.

Explanation of Solution

  1. (i) If the income is $20,000, 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
Income elasticity of demand.

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