Question

Question 5

A. Explain five uses of the concept of elasticity of demand.

B. The demand curve for widgets is

QD = 10,000 - 25P.

a. How many widgets could be sold for $100?

b. At what price would widget sales fall to zero?

c. What is the total revenue (TR) equation for widgets in terms of output, Q? What is the marginal revenue equation in terms of Q?

d. What is the point-price elasticity of demand when P = $200? What is total revenue at this price? What is marginal revenue at this price? Explain your result.

e. Suppose that the price of widgets fell to P = $150. What would be the new point-price elasticity of demand? What is total revenue at this price? What is marginal revenue at this price? Explain your result.

f. Suppose that the price of widgets rose to P = $250.What would be the new point-price elasticity of demand? What is total revenue at this price? What is marginal revenue at this price? Explain your result.

g. Suppose that the supply of widgets is given by the equation

QS = -5,000 + 50P.

What is the relationship between quantity supplied and quantity demanded at a price of $300?

h. In this market, what is the equilibrium price and what is the quantity?

Answer 1

Uses of elasticity -

1. Pricing -Prices for goods with elastic demand should not be highly fluctuating.
2. Revenue maximization - To maximise revenue, price is increased in case of inelastic demand while decreased during elastic demand.
3. Expenditure minimization - Consumer wants to minimise his expenditure. This is possible when good is inelastic and price increases.
4. Impact of change in competitor's price.
5. Impact of advertising on sales.

b. P = 100

Q = 10000 - 25 x 100

Q = 7500

bPut Q = 0, 10000 =25P

P = 10000/25 = 40

c. TR = pQ and p = 400 - 0.04Q

TR = 400Q - 0.04Q²

MR = dTR/dQ = 400 - 0.08Q