Question

1. The owner of a health club asks you for advice about whether the company should raise the price of its membership this year based on the following information: last year the club raised the price of its membership by 5% and the number of members paying the same fee fell by 7%.


2. The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The administrators said that they needed an increase in revenue to cover their rising costs. Explain the economic rationale for this decision.


3. The following data shows the relationship between price and quantity demanded at four different prices for a product:

P = $11, Qd = 16
P = $9, Qd = 24
P = $7, Qd = 32
P = $5, Qd = 40

Using the midpoints formula, what is the price elasticity of demand between: (a) $11 and $9; (b) $9 and $7; (c) $7 and $5?

4. The following is a straight-line demand curve that confronts a single firm.

Quantity
Price demanded (3) (4)  
$6 1 _____ _____
5 2 _____ _____
4 3 _____ _____
3 4 _____ _____
2 5 _____ _____
1 6 _____ _____

(a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of demand at each price using the midpoints formula.
(b) Describe the character of elasticity across the prices based on the total revenue test and the elasticity coefficient.
(c) Does a straight-line demand curve have constant elasticity?
(d) Of what practical significance is your answer to (c)?


5. Using the supply data in the schedule shown below, complete the table by computing the price elasticity of supply coefficients between each set of prices. Indicate whether supply is elastic, inelastic or unitary at each set of prices.

Quantity Elasticity Character
Price supplied coefficient of supply
$11 130 _________ _________
9 110 _________ _________
7 90 _________ _________
5 70 _________ _________
3 50 _________ _________

Answer 1

1. The concept to be used is Ed or elasticity of demand wrt price. It measures the responsiveness of change in quantity demanded wrt change in prices.

Ed= percentage change in quantity/ percentage change in price

= 7/5 = 1.4

Since ed is highly elastic as 1.4 exceeds unity, raising membership fee will result in loss of a higher percentage of members.

2. The economic rationale behind increasing the ticket price is that rising operating costs can result in losses until is no more viable to continue operations. The marginal revenue has to be increased in accordance with rising marginal costs to continue operations. So if input costs are rising, raising the ticket prices is crucial for continuing operations.

3.