Economics Price Elasticity of Demand

PROBLEM SET ONE 3 – PRICE-ELASTICITY OF DEMAND
P1 P2 QD1 QD2 I II III IV V
1 1 2 10 5
2 3 2 9 9
3 0.40 1.40 30 15
4 1.2 4.0 20 15
5 7.5 4.6 40 30
6 6 12 12 6
7 18 36 360 180
8 5 5.000…01 1×106 0
9 5 4.9999…. 10 1×109
10 5 3 40 90
11 12 20 200 200
12 7 15 24 16
13 7 16 78 78
14 8 4 30 54
15 140 275 625 495
16 25 65 150 100
17 65 91 1300 780
18 4 5 21 11
19 78 91 780 780
20 91 78 780 780

Column I – determine the Price-Elasticity of Demand Coefficient. Refer to the Price-Elasticity Coefficient and Formula :

change in quantity demanded change in price
EP = —————————————- ∕ —————————-
sum of quantities demanded / 2 sum of prices / 2

The data in the first four columns represent price (P) and quantity demanded (Qd) in time 1 (before change in price) and time 2 (after change in price) for a specified good. Note that results should be expressed in absolute terms. For example, -1 should be expressed as │1│, as should a positive 1.

Column II – Interpret the results and indicate the type of elasticity which applies (such as Elastic, Inelastic, Perfectly Elastic, Perfectly Inelastic, Unitary) based on how the quantity demanded changed subsequent to a change in price.

Column III – Determine if the good in question would be considered a necessity, a luxury or neither.

Column IV – Indicate, in monetary terms, how much is the change in total revenue or total expenditure (TR = P X QD), from the first price level to the second.

Column V – indicate the direction of the change, that is, increasing or decreasing (show a + sign for increasing and a – sign for decreasing).

Note: for any monetary result please include the applicable currency symbol ($, €, etc.).

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