3. a.

672,000 x $1 $672,000
623,000 x $1.15 716,450
Revenue increase $44,450

b. Ep = ((672000-623000)/(672000+623000)) / ((1-1.15)/(1+1.15))
= .037838/-.069767
= -.542

c. Increases in gasoline prices and automobile insurance during the year may have mitigated the
bus fare increases, thus causing fewer commuters to switch away from using buses. Increases in
personal income may also have been instrumental. These changes would have affected the
demand curves for commuting, rather than be an example of price elasticity.

6. a. 1800 2000 - 200

b. $0 2000 = 2000 - 20P

$100 0 = 2000 - 20P

$25 1500 = 2000 - 20P

c. Q = 2000 - 20P
20P = 2000 - Q
P = 100 - .05Q
TR = PQ = 100Q - .05Q2

MR = 100 - .1Q

d. Q = 2000 - 20(70) = 600

TR = 600 x 70 = 42000
or
TR = 100Q - .05Q2
= 60000 - .05(600)2
= 60000 - 18000
= 42000

MR = 100 - .1(600)
= 100 - 60 = 40

e. ε = dQ/dP x P/Q
= 20 x 70/600
= 1400/600 = 2.33

f. Q = 2000 - 20(60)
 = 800

TR = 800 x 60 = 48000

MR = 100 - .1(800)
= 20

ε = 20 x 60/800
= 1200/800 = 1.5

g. At ε = 1 MR = 0

0 = 100 - .1Q
.1Q = 100
Q = 1000

Proof: 1000 = 2000 - 20P

20P = 1000
P = 50

ε = 20 x 50/1000 = 1000/1000 = 1

11. a. 130 – 70 2.50 – 3.50

Ep = —————— / ————
130 + 70 2.50 + 3.50

EP = 1.8

b. 90 - 40 2.50 – 3.50
Ex = —————— / ————
90 + 40 2.50 + 3.50

Ex = 2.3

14. Arc price elasticity for spreadsheet program:

(120 - 100) (350 - 400)

Ep = ————— , —————
(120 + 100) (350 + 400)

= -1.36

Arc cross elasticity for graphics program:

(56 - 50) (350 - 400)

 Ex = ———— , —————
(56 + 50) (350 + 400)

= -0.85

The quantity demanded for spreadsheets increased due to the price change. The price elasticity is
greater than (absolute) 1, and therefore revenue will rise from $40,000 to $42,000.

The graphics program is a complementary commodity to the spreadsheet program, and its quantity
sold benefited from the price decrease in the spreadsheet program. The cross-elasticity is -0.85 (the
negative sign shows complementarity), and is quite strong.