Joseph Brian P.

Genil
BSBS FM1 (Group 2)

UNIT 4: CONSUMER BEHAVIOR

ACTIVITY 2: ELASTICITY QUESTION AND PROBLEM

Please answer these questions completely and thoroughly.

1. Briefly discuss why the negative sign is usually ignored when computing for price
elasticity of demand.
Sometimes you will see the absolute value of the price elasticity measure reported. In essence,
the minus sign is ignored because it is expected that there will be a negative (inverse)
relationship between quantity demanded and price.

2. Briefly explain the effect of price elasticity of demand to the total revenue. Cite an
example. 

If the demand is elastic, a price increase will result in a rapid decrease in demand as a result
total revenue decreases.

Total revenue= price × demand

Elastic demand means if the price of the product changes, demand will change drastically.

Let's take an example

Price of a product= Rs 10per unit
Quantity demanded= 100 units
Total revenue Rs 1000(10×100)
Now, what if the price of the product is increased.
Price of a product= Rs 12 per unit
Quantity demanded= 80 units(say)
Total revenue = Rs 960
 

3. Compute the total revenue and price elasticity of demand. Use the formula for point
elasticity.
Points Price Qty Demanded

Points Price of Good Quantity Demand of Total Price Elasticity of

x Good x Revenue Demand
(P )
x (Qd )x (P x Qd)
A 50 150 7,500 -3.3
B 45 200 9,000 2.27
C 40 250 10,000 -1.6
D 35 300 10,500 -1.21
E 30 350 10,500 -0.82
F 25 400 10,000 -0.625
G 20 450 9,000 -0.44
H 15 500 7,500 -0.30
I 10 550 5,500 -3.34
SOLUTION:

   
POINTS A T B POINTS B TO C POINTS  C TO D
POINTS D TO E POINTS E TO F
Q -Q 2 1 Q -Q 2 1 Q -Q
2 1 Q -Q2 1

Q -Q2 1    Q 1        Q 1        Q 1        Q 1    

   Q 1      E =          P -P
d 2 1  E =          P -P
d 2 1  E =          P -P
d 2 1  E =          P -P
d 2 1

 E =          P -P
d 2 1                     P 1                     P 1                     P 1                     P 1

                    P 1

250-200 300-230 350-30 400-350

200-150    200      230         300         350     

   150       E =          40-45

d  E =          35-40
d  E =          30-35
d  E =          25-30
d

 E =          45-50
d                     45                     40                     35                     30
                    50
50 50 50 50
50    200         250         300        350     

   150       E =             -5  

d  E =              -5
d  E =              -5
d  E =              -5
d

 E =              -5
d                     45                     40                    35                     30
                    50 =0.25 =0.2 =0.17 =0.14
=0.33 -0.11 -0.125 -0.14 -0.17
-0.1 E =|-2.27|Elastic
d E =|-1.6|Elastic
d E =|-1.21|Elastic
d E =|-0.82|Inelastic
d

E =|-.3|Melastic
d

 
POINTS F TO G POINTS G TO H POINTS  H T I
POINTS I TO A
Q -Q 2 1 Q -Q 2 1 Q -Q 2 1

Q -Q2 1    Q 1        Q 1        Q 1    

   Q 1      E =          P -P
d 2 1  E =          P -P
d 2 1  E =          P -P
d 2 1

 E =          P -P
d 2 1                     P 1                     P 1                     P 1

                    P 1

500-450 560-500 550-150

450-400    450      510        150   
   400       E =          15-20
d  E =          10-15  
d  E =          10-50
d

 E =          20-25
d                     20                     15                     50
                    25
50 50 400
50    450         5000         150     

   400       E =             -5  

d  E =              -5
d  E =              -40
d

 E =              -5
d                      20                     15                       50
                    25 =0.11 =0.1 =2.67
=0.125 -0.25 -0.33 -0.8
-0.2 E =|-0.44|Inelastic
d E =|-0.30|Inelastic
d E =|-3.34|Inelastic
d

E =|-0.625|Inelastic
d
 4. The income of Mr. De la Cruz increased from P300 to P450 a day. His demand for
grocery items increased from 200 to 500. Compute for his income elasticity of demand.

Solution:

Let: Y1=300              QD1=200

Y2=450              QD2=500

EY= QD2- QD1       X =    Y2+Y1

Y2-Y1                        QD2- QD1

EY=500-200    X        450+300
450-300                       500+200

EY= 300    X        750

150                   700

EY=2X1.07

EY=2.14

5. The price of product A increased from P20 to P40. The demand for Product B went up
from 100 to 200. Calculate the cross elasticity of demand.
 
Solution:

Let: QDX1=100              PX1=20

QDX2=200               PX2=40

EY= QDX2- QDX1       X        PY2+PY1

PY2-PY1                              QDX2- QDX1

EY=200-100    X        40+20
40-20                           200+100

EY= 100    X      60
20                 300

EY= 5 X 0.2

EY=1