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Question 5 a. Suppose a market has the demand function Qd=20-0.5P. Using the midpoint method, what...

Question 5

a. Suppose a market has the demand function Qd=20-0.5P. Using the midpoint method, what is the price elasticity of demand between $30 and $40?

b. Suppose you manage a baseball stadium. To pay the salary for a star player, you would like to increase the total revenue from ticket sales. Should you increase or decrease the price of a ticket to increase revenue? Explain.

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Homework Answers

Answer #1

a) P1 = $ 30 and P2 = $ 40

Q1 = 20 - 0.5 x 30 = 5 and Q2 = 0

PE = (Q2 - Q1)/(P2 - P1) x (P2 + P1)/(Q2 + Q1) = -5/10 x 70/5 = -7 (absolute value = 7)

b)

One should increase the price of a ticket if the demand is inelastic (abs (PE) < 1, total revenue would increase as quantity doesn't vary much), whereas one should decrease the price of a ticket when the demand is elastic (abs (PE) > 1, total revenue would increase as quantity effect > price effect)

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