04 Jun Question The mid points variation of the arc own price elasticity of demand formula is as follows: h = – [(Q1 – Q0) / (Q0 + Q1)] X [(P0 + P1)
Question
The mid points variation of the arc own price elasticity of demand formula is as follows:
h = – [(Q1 – Q0) / (Q0 + Q1)] X [(P0 + P1) / (P1 – P0)] where (P0, Q0) and (P1, Q1) are two price – quantity demanded combinations.
Show all work.
1. The own price elasticity of demand for gasoline is estimated to be 0.6.
a. Classify the demand as elastic, inelastic or unit elastic.
b. Predict the percentage change in quantity demanded if price increases by 40%.
2. The own price elasticity of demand for sporting goods is estimated to be 2.4.
a. Classify the demand as elastic, inelastic or unit elastic.
b. Predict the percentage change in quantity demanded if price decreases by 15%.
3. The own price elasticity of demand for public transportation is estimated to be 0.4.
a. Classify the demand as elastic, inelastic or unit elastic.
b. Determine the percentage change in price required to increase the quantity demanded of public transportation by 12%.
4. Suppose that two price-quantity demanded combinations for some product are ($1.20, 90 units) and ($0.80, 110 units). Using the mid points variation of the arc own price elasticity of demand formula, calculate the coefficient of elasticity for both a price increase and a price decrease. Show all work.
5. The following table represents the demand schedule for museum admissions in a small city:
Price (per visit per person) Quantity Demanded (thousands of person visits per year)
A $10 2
B 8 4
C 6 6
D 4 8
E 2 10
a. What is the shape of the corresponding demand curve – linear or non linear?
b. Using the mid points variation of the arc own price elasticity of demand formula, calculate the coefficient of elasticity between combinations A and B, B and C, C and D, and D and E. Show all work. For each calculated coefficient of elasticity, classify the demand as elastic, inelastic or unit elastic.
c. What is the change in the value of the coefficient of elasticity as price decreases – increases, decreases, or no change? Does demand become more inelastic or more elastic?
d. What is the explanation for the change in the coefficient of elasticity as price decreases?
e. For each combination, calculate total revenue (TR) = P X Q.
f. Between what two combinations is total revenue the greatest?
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