University of Illinois Department of Economics

Econ 103-Fall 2014 Exercise 2 TA: Zheng Zhang

1. The following is a demand schedule for jogging shoes:

Price per Pair Quantity demanded (pairs per day)

$140 2
120 6
100 10
80 14
60 18
40 22
20 26

a. Draw the demand curve on the graph below.

140

120

100

80

60

40

20
D1
6 10 14 18 22 26

b. Calculate the arc elasticity coefficient as price decreases from $120 to $100,
$80 to $60, and $60 to $40.

Ed = Q2-Q1/(Q2+Q1)/2
P2-P1/(P2+P1)/ 2

From $120 to $100: Ed = 2.77

From $80 to $60: Ed = .88

From $60 to $40: Ed = .50

 c. What happens to the coefficient of elasticity as P decreases along the
demand curve?
What happens to TR as P decreases?
Explain the relationship between P, TR, and elasticity.

Along the demand curve, as P decreases, the elasticity coefficient

varies.
As price decreases, Total Revenue increases when demand is price
elastic, then Total Revenue decreases when demand becomes price
inelastic.
Relationship between P, TR, and elasticity is the following:
*When E>1, as P decreases, TR increases.
*When E=1, as P decreases, TR stays the same and is at maximum.
*When E<1, as P decreases, TR decreases.

2. Suppose that, because of the impact of Hurricane Mitch in

Central America, the price of bananas rises from $0.50 to $1.00 per pound and the
quantity demanded falls from 1000 pounds to 400 pounds.

a. Calculate the midpoints elasticity (arc elasticity) of demand for bananas in

this price range.

Arc Ep = .428/.333 = 1.28 or 1.3

b. Are bananas elastic, unitary elastic, or inelastic in this price range?

price elastic because absolute value of Ep > 1.

c. What is the interpretation of that price elasticity of demand?

Consumers are responsive to a price change because the percentage

change in quantity demanded is larger than the percentage change in
price.

d. If the price of bananas were to increase by 15 percent, what would be the

percentage change in the quantity demanded?

Percentage change in quantity demanded = 1.3 x 15 = 19.5 percent.

2
e. If the price of bananas were to increase by 20 percent, what would be the
percentage change in the quantity demanded?

Percentage change in quantity demanded = 1.3 x 20 = 26 percent

f. What happens to total revenue for banana sellers when the price of
bananas increases? Explain your answer.

TR decreases because bananas are price elastic in this price change.

g. Give 2 factors that would cause bananas to have this elasticity of demand
calculated in part (a) above.

1) existence of other fruits that are good substitutes.

2) Banana is not a necessity.