Name: Muntasir Ahmmed

Student ID: AIU20092093

Tutorial 4

Question 1

What happens to the quantity demanded of a commodity when its price falls? How do we
measure the responsiveness in the quantity demanded of a commodity to a change in its
price?
Answer: When the price of a commodity falls, we can expect the demand for it to increase. Law
of demand states that when price increases, the demand for the commodity falls and vice-versa.

The measure of responsiveness of the demand for a good towards the change in the price of a
related good is called cross-price elasticity of demand. It is always measured in percentage terms.

Question 2
Define the perfectly elastic demand by sketch the graph. When will perfectly elastic
demand occur?

Answer:

Perfectly elastic demand means when the percentage of change in quantity demanded is infinite
even if the percentage of change in price is zero, the demand is said to be perfectly elastic.
Perfectly elastic demand is a rare occurrence where the quantity that is demanded change
infinitely when there is a little change in the price of the product. It is represented by a horizontal
demand curve, as seen above.
Perfect elastic demand is considered a theoretical extreme case and there isn’t really any real-life
product that could be considered perfectly elastic. However, the idea is beneficial in economic
analysis.

Question 3
Price Quantity %∆Price %∆Quantit Total Description
Demanded y revenue
8 30 15 25

7 40 17 20

6 50 20 17

5 60 25 15

4 70 34 13

3 80 50 12

2 90 100 10

1 100 - -

(a) Calculate the price elasticity of demand between $1 and $2; $2 and $3; $3 and $4; $4
and $5; $5 and $6; $6 and $7; $7 and $8.

(Q 2−Q 1) /[ (Q 2+Q 1/2 ) ]

Answer: Price elasticity of demand = (P 2−P 1) /[ ( P 2+ P 1/2 ) ]

Prices Elasticity

7 to 8 2.14

6 to 7 1.44

5 to 6 1.00

4 to 5 0.69

3 to 4 0.47

2 to 3 0.29

1 to 2 0.16

(b) Calculate the total revenue.

 Price Quantity Demanded Total revenue

8 30 240

7 40 280

6 50 300

5 60 300

4 70 280

3 80 240

2 90 180

1 100 100

(c) Describe the elasticity of demand for each change in price (Elastic or Inelastic).

Prices Elasticity
Description
(Elastic or Inelastic)
7 to 8 2.14 Elastic

6 to 7 1.44 Elastic

5 to 6 1.00 Unit Elasticity

4 to 5 0.69 Inelastic

3 to 4 0.47 Inelastic

2 to 3 0.29 Inelastic

1 to 2 0.16 Inelastic
(d) Why we eliminate the minus sign when we calculate the price elasticity of demand?

Answer: We eliminate the minus sign when we calculate the price elasticity of demand
because the demand curve slopes downward, Ed will always be a negative number.
Therefore, we take the absolute value and ignore the minus sign.