Question for Discussion – Page 58-59

1. Briefly discuss why the negative sign is usually ignored when computing for price elasticity of
demand.

Minus signs are overlooked to maintain a strategic distance from pointless perplexity. As it were
changes in cost and changes in amount are taken into consideration when calculating flexibility of
request. The negative sign doesn't matter because it doesn't influence the flexibility of request.

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

The cost flexibility of request is connected to add up to income. Since add up to income is the result
of cost and amount, versatility measures the alter in amount requested as a result of a alter within the
cost of the great in this way changing the esteem of the entire income.

For illustration, on the off chance that request is versatile at a given cost level, a rate diminish in cost
will result in an indeed bigger rate increment in amount requested, coming about in the next add up to
income. In case, on the other hand, request is inelastic at the first amount level, a cost increment will
result in a littler rate diminish within the amount requested — and add up to income would increment.

3. Compute the total revenue and price elasticity of demand and fill in the missing figures in the
table presented below. Use the formula for point elasticity.

Point Price of Good x Quantity Demand of Good x Total Revenue Price Elasticity of Demand
s (Px) (Qdx) (P x Qd)
A 50 150 7,500 3.34
B 45 200 9,000 3.3
C 40 250 10,000 2.27
D 35 300 10,500 1.54
E 30 350 10,500 1.21
F 25 400 10,000 0.82
G 20 450 9,000 0.65
H 15 500 7,500 0.44
I 10 550 5,500 0.30

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
 Chapter Test – Page 59-60

1. Shown in the table is the income of an individual with corresponding unit of goods it can
purchase. Fill in the blanks and solve for the income elasticity. Also indicate the classification of
goods.

Income Qd of Good X % M % Qdx Income Classification

(M) (units/yr) Elasticity of Goods
5,000 100 1.4 1.8 0.29 Normal; Necessity
12,000 280 0.67 0.8 1.19 Normal; Necessity
20,000 504 0.45 0.4 0.89 Normal; Luxury
29,000 705 0.38 0.2 0.53 Normal; Luxury
40,000 846 0.33 -0.11 -0.33 Inferior
53,000 750 0.23 -0.10 -0.43 Inferior
65,000 677 -0.92 -0.85 1.08 Inferior

2. Using the graph below, compute for the price elasticity of the following points:

POINT A and B POINT F and G

POINT B and C POINT G and H
POINT C and D POINT H and I
POINT D and E POINT I and J
POINT E and F POINT A and J

POINT A and B POINT B and C POINT C and D POINT D and E POINT E and F
FORMULA: FORMULA: FORMULA: FORMULA: FORMULA:

2Q -Q 1
2Q -Q 1 2Q -Q 1
Q -Q
2 1 2Q -Q 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

               P1
               P1                P1
               P 1                P1

= 30-10 = 40-30 = 50-40 = 80-50 = 100-80

10 30 40 50 80

25-30 22.5-25 20-22.5 15-20 12.5-15

30 25 22.5 20 15

= 20 = 10 = 10 = 30 = 20
10 30 40 50 80

-5 -2.5 -2.5 -5 -2.5

30 25 22.5 20 15

= 2 = 0.33 = 0.25 = 0.6 = 0.25

-0.17 -0.1 -0.11 -0.25 -0.17

Ed= |-11.76| or Ed= |-3.3| or 3.3 Ed= |-2.27| or Ed= |-2.4| or 2.4 Ed= |-1.47| or
11.76 ELASTIC 2.27 ELASTIC 1.47
 ELASTIC ELASTIC ELASTIC

POINT F and G POINT G and H POINT H and I POINT I and J POINT A and J
FORMULA: FORMULA: FORMULA: FORMULA: FORMULA:

Q -Q
2 1
Q -Q 2 1 Q -Q 2Q -Q 1
2Q -Q 1
2 1

   Q 1    
   Q 1        Q    Q 1    
   Q 1    
1    

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

               P 1
               P 1                P                P1
               P1
1

= 110-100 = 120-110 = 130-120 = 150-130 = 10-150

100 110 130 150
120
10-12.5 5-10 1-2.5 30-1
2.5-5
12.5 10 5 2.5 1

= 10 = 10 = 10 = 20 = -140
100 110 130 150
120
-2.5 -5 -1.5 29
-2.5
12.5 10 5 2.5 1

= 0.1 = 0.09 = 0.08 = 0.15 = -0.93

-0.2 -0.5 -0.6 29
-0.5
Ed= |-0.5| or 0.5 Ed= |-0.18| or Ed= |-0.16| or Ed= |-0.25| or Ed= |-0.03| or
INELASTIC 0.18 0.16 0.25 0.03
INELASTIC INELASTIC INELASTIC INELASTIC

3. Compute for the cross elasticity of the following commodities:

1ST SET OF GOODS

COMMODITY BEFORE AFTER

PRICE/UNIT QUANTITY PRICE/UNIT QUANTITY
RIBBON (Y) 3,000 1,000 3,500 850
INK (X) 450 700 450 600

COMPUTATIONS:
FORMULA: -Q X

Q X   

E =    -P
XY Y

            P Y

= 600 – 700   3,000

       700        .
3,500 – 3,000 = -0.14
     3,000     0.17

= -100 = -0.82
    700   .

   500 

2ND SET OF GOODS

COMMODITY BEFORE AFTER
 PRICE/UNIT QUANTITY PRICE/UNIT QUANTITY
USB (Y) 1,500 900 2,000 800
CD (X) 200 300 200 400

COMPUTATIONS:
FORMULA: -Q X

QX   

E =    -P
XY Y

            P
Y

= 400 – 300
      300        .
2,000 – 1,500
    1,500 

=  100
    300  .
   500
 1,500

= 0.33
   0.33

=1

4. Compute for the arc elasticity of the following points (from point A to H) on a demand curve.

POINT A – B POINT E – F
POINT B – C POINT F – G
POINT C – D POINT G – H
POINT D – E POINT A – H

POINTS P Qd
A 2 70
B 5 63
C 8 60
D 13 58
E 15 54
F 19 51
G 20 45
H 23 42

POINTS A-B POINTS B-C POINTS C-D POINTS D-E 

= 63 – 70      ( 2 + 5 ) = 60 – 63       ( 5 + 8 ) = 58 - 60      ( 8 + 13 ) = 54 - 58      ( 13 + 15 )

     5 – 2   X       2          .      8 - 5   X        2          .    13 - 8   X       2          .    15 - 13   X       2         
                   ( 70 + 63 )                    ( 63 + 60 )                    ( 60 + 58 ) .
                          2                           2                           2                    ( 58 + 54 )
                          2
= -7       ( 7/2 )    . = -3       ( 13/2 )  . = -2       ( 21/2 )    .
    3   X  ( 133/2 )     3   X  ( 123/2 )     5   X  ( 118/2 ) = -4       ( 28/2 )    .
    2   X  ( 112/2 )
= -2.33 X 0.05 = -1 X 0.11 = -0.4 X 0.18
= -0.12 = -0.11 = -0.07 = -2 X 0.25
= -8

  POINTS E-F POINTS F-G POINTS F-G POINTS A-H

 = 51 - 54      ( 15 + 19 ) = 45 - 51      ( 19 + 20 ) = 45 - 51      ( 19 + 20 ) = 42 - 70      ( 2 + 23 )
   19 - 15   X       2             20 - 19   X       2             20 - 19   X       2               23 - 2   X       2          .
. . .                    ( 70 + 42 )
                   ( 54 + 51 )                    ( 51 + 45 )                    ( 51 + 45 )                           2
                          2                           2                           2
= -28       ( 25/2 )    .
= -3       ( 34/2 )    . = -6       ( 39/2 )    . = -6       ( 39/2 )    .     21   X  ( 112/2 )
    4   X  ( 105/2 )     1   X  ( 96/2 )     1   X  ( 96/2 )
= -1.33 X 0.22
= -0.75 X 0.32 = -6 X 0.41 = -6 X 0.41 = -0.29
= -2.34 = -2.46 = -2.46

5. The price of bicycle increased from P3,500.00 to P4,000.00. the demand for motorcycle went up
from 12,000 units to 12,500 units. Compute for the cross elasticity of demand. Determine
whether substitute or complement product.

FORMULA:

EXY = 12,500 – 12,000

12,000

= 4,000 – 3,500
3,500

= 500
12,000

= 500
3,500

= 0.04
0.14

EXY = 0.29

The bicycle and motorcycle are SUBSITITUTE PRODUCTS. The cross elasticity of demand is POSITIVE.