Question

1. What is the mid-point method? Explain the component parts of the formula

2.Explain the following: a) Utility-Maximizing Rule and include the formula b) Water-Diamond Paradox

3. Determinants of price elasticity of supply

Answer 1

( Since question number is not specified , I would answer the very first question)

Elasticity can be calculated using point method or mid point method.

In mid point method , instead of using simple percentage change in quantity and price , economists uses average change in quantity and price.

Price elasticity of demand ( using mid point method) = {Q2 - Q1/( Q1+Q2)/2}/{P2-P1/(P1+P2)/2}

( A point here to clarify is that 2&1 next to P&Q are in subscript.)

where, Q2-Q1 - Change in quantity demanded

Q1+Q2/2 - Average of quantities in both time periods

P2-P1    -    Change in price

P2-P1/2    -    Average of prices

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