Question

II-1.Suppose that your demand schedule for DVDs is as beside.

Demand Schedule

Use the mid point method to calculate your price elasticity

Price

Quantity Demanded (income = $10,000)

Quantity Demanded (income = $12,000)

of demand as the price of DVDs increases from $8 to $10, when

$8

40 DVDs

50 DVDs

1.1 if your income is $10,000:

$10

32

45

$12

24

30

1.2 if your income is $12,000:

$14

16

20

$16

8

12

II-2. Consider public policy aimed at smoking.

Studies indicate that the price elasticity of demand for cigarettes is about 0.5. If a pack of cigarettes currently costs $4 and

the government wants to increase the price to $6 per pack.

Then, how much would the demand of cigarettes decline in relative term (or in %)?

2.1 What is the price change in relative term (Rel_Prc_Chg), using the mid point method?

Rel_Prc_Chg = (6-4)/[(4+6)/2] =

2.2 What should be the change in quantity demanded in relative term (Rel_Qty_Chg), to get the price elasticity of 0.5?

Price Elasticity of Demand = 0.5 = - (Rel_Qty_Chg / Rel_Prc_Chg) ---> Rel_Qty_Chg = - 0.5 * Rel_Prc_Chg

II-3. Suppose that an increase in the price of a good from $4 to $5 causes the quantity demanded of the good to fall from 95 to 85.

3.1 What is the price elasticity of demand of the good when price changes from $4 to $5?

3.2 When the price of the good changes from $4 to $5, does the total revenue increase or decrease?

revenue = a paricular price of a good * quantity demanded of the good at that price

3.3 By how much does the total revenue increase or decrease?

revenue = a paricular price of a good * quantity demanded of the good at that price

dollars

3.4 Assume the price elasticity of demand of the good is 2 when the price changes from $4 to $5. If the price rises fro $4 to $5,

then how will the total revenue change, increase or decrease?

revenue change = revenue after change - revenue before change

Answer 1