Wong, Michaela Rose C.

Learning Assessment M3D

1798 BEPMC311

PROBLEMS

1. Consider the following: If the price per unit of good A is P200 quantity purchased is
valued at 1,500 units. If price changes (increase or decrease) by P1, quantity demanded
changes (decreases or increases) by 4 units.

Price Qd
200 1500
175 1600
150 1700
125 1800
100 1900
75 2000
50 2100
25 2200

A. Determine the demand function expressed as a price function. (2 points)

Demand P Function:

P P

P – 200 = -0.25Q + 375 P = -0.25Q + 375 + 200

P = -0.25Q + 575

B. Set up a demand schedule for this function and determine the price elasticity of
demand at various P and Qd combinations using point-price elasticity formula.
(Make sure that all elasticity concepts are found on the same demand curve.)
(10 points)

POINT-PRICE ELASTICITY OF DEMAND

 DEMAND SCHEDULE SLOPE = -4

P Qd Applying the Point-Price ℇd Type

Elasticity Formula
575 0 α Perfectly Elastic

550 10 |22|
0
525 20 |10.5|
0
500 30 |6.67|
0
475 40 |4.75|
0
450 50 |3.6|
0 Elastic
425 60 |2.83|
0
400 70 |2.29|
0
375 80 |1.88|
0
350 90 |1.56|
0
325 10 |1.3|
00
300 11 |1.09|
00
11 |1| Unitary Elastic
287.5 50
275 12 |0.92|
00
250 13 |0.77|
00
225 14 |0.64|
00
200 15 |0.53|
00 Inelastic
175 16 |0.44|
00
150 17 |0.35|
00
125 18 |0.28|
00
100 19 |0.21|
00
75 20 |0.15|
00
 50 21 |0.1|
00
25 22 |0.05|
00
0 23 0 Perfectly Inelastic
00

MID-POINT ARC ELASTICITY

C. Determine the TR and MR functions. (4 points)

TR FUNCTION

TR = P*Q
= (-0.25Q + 575) Q
TR = -0.25Q² + 575Q

MR FUNCTION

MR = dTR/dQ = (1)aQ¹ ֿ ¹ + (2) (-b)Q² ֿ ¹

= (1) 575Q¹ ֿ ¹ + (2) (-0.25) Q² ֿ ¹
MR = 575 – 0.5Q
D. Graph the demand curve and the TR curve (TR curve just below the demand curve)
(6 points)

E. At what P and Qd combination will TR be maximum? (2 points)

TR will be maximum at midpoint of demand curve.

Half of the full range of quantity demanded: 2,300/2 = 1,150

Half of the full range of total revenue: 575/2 = 287.50

 Total revenue will be at maximum at P=287.5 and Qd = 1150

2. Suppose the own price elasticity of demand for good X is –2, its income elasticity is 3,
and the cross-price elasticity of demand between it and good Y is –6.

A. Interpret the elasticity coefficients. (6 points)

1. Own price elasticity of demand coefficient for good X is -2. This means that
for every 1% change (increase or decrease) in P, Qd changes (decrease or
increase) by 2%. Since the absolute value of the coefficient is |2|, the
demand for the good is elastic.

2. Since the income elasticity coefficient is positive, then the good under
consideration (X) is a normal good. The coefficient is also greater than 1,
therefore good X is a luxury good.

3. Since the cross-price elasticity of demand between good X and Y is

negative, good X and Y are inferior complements. Moreover, since the
coefficient are greater than -1, goods X and Y are strong complements.

B. Determine how much consumption of this good will change

if:

B.1 The price of good X increases by 5%. (2 points)

= % change in quantity demanded/% change in price

-2 = (% change in quantity demanded) / (5)

% change in quantity demanded (1) = -2*5

% change in quantity of good X demanded = -10%

 If price of good X increases by 5%, then quantity

demanded will decrease by 10%.

B.2 The price of good Y increases by 10%. (2 points)

= % change in quantity demanded/% change in price

-6 = (% change in quantity demanded) / (10)

% change in quantity demanded (1) = -6*10

% change in quantity of good Y demanded = -60%

 If price of good Y increases by 10%, then quantity

demanded will decrease by 60%. Also, since the
cross-price elasticity between good X and Y is still
greater than -1, good X and Y are strong
complements.
B.3 Income falls by 3%. (2 points)

= % change in quantity demanded/% change in income

3 = % change in quantity demanded / (-3)

% change in quantity demanded (1) = 3 (-3)

% change in quantity demanded = -9%

 If income decreases by 3%, then quantity demanded will

decrease by 9%.