Coleen Lara Sedilles November 30, 2020

BSA – II AE 205 – Managerial Economics

Chapter 03: Elasticity and Demand

5. Use the graph below of a linear demand curve to answer questions 5 and 6.
a. The equation for the linear demand in the figure above is Qd = 6,250 – 125P.

b. The equation for the inverse linear demand is P = 50 – 0.008Qd.

c. Using the equations in parts a and b, find the missing prices and quantities at
points A – F:
A. P = 50 – 0.008(750) D. P = 50 – 0.008(3,250)
P = $44 P = $24
B. Q = 6,250 – 125(42) E. Q = 6,250 – 125(15)
Q = 1,000 Q = 4, 375
C. Q = 6,250 – 125(26) F. P = 50 – 0.008(5,000)
Q = 3,000 P = $10

d. Compute the following interval (or arc) elasticities:

Interval of A to B:

Interval of C to D:

Interval of E to F:

e. Compute the following point elasticities using the two formulas

and :
Point A:

Point C

Point E

f. Demand is unitary elastic at a price of $25 and quantity of 3,125.

g. As quantity increases along the demand curve, demand becomes less elastic.
As price falls along the demand curve, demand becomes less elastic.
6. Use the figure in question 5 to answer the following:
a. The equation for marginal revenue is MR = 50 – 0.016Q.
b. MR crosses the price-axis at P = $50. MR is zero at Q = 3,125.
c. If MR is positive, then demand is elastic.
d. If MR is zero, then demand is unitary elastic.
e. If MR is negative, then demand is inelastic.