Question

1.) Suppose if the price of a good is \$12, the quantity demanded is 50 units;...

1.) Suppose if the price of a good is \$12, the quantity demanded is 50 units; when the price is \$10, the quantity demanded is 100 units. Use the midpoint approach to compute the price elasticity of demand. Is demand at this point relatively responsive or relatively unresponsive to price changes?

2.) For this exercise you will need to first build a graph to these specifications: Draw a downward sloping demand curve with vertical intercept (0,4) and horizontal intercept (8,0). Label the price above which the demand is always elastic. Label the portion of the curve at which a decrease in price will lead to increased revenue. If the price is currently \$3, will revenue rise or fall if price drops to \$2?

Question 1

Calculate the price elasticity of demand -

P1 = \$12

Q1 = 50 units

P2 = \$10

Q2 = 100

Ed = -3.67

The price elasticity of demand as per midpoint approach is -3.67.

The value of price elasticity of demand is greater than 1. When value of price elasticity of demand is greater than 1, demand is said to be elastic.

So, at this point demand is elastic.

When demand is elastic, quantity demanded is relatively responsive to the price changes.

Thus, at this point, demand is relatively responsive to price changes.

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