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Learning Assessment M3D

1. The demand function for good A is P = -0.25Q + 575. At a price of P=287.5 and quantity of Qd=1150, total revenue would be at a maximum. 2. For good X: a 5% price increase would decrease demand by 10%; a 10% price increase for substitute good Y would decrease demand for X by 60%; a 3% decrease in income would decrease demand for X by 9%. Good X is elastic, a luxury good, and a strong complement to good Y. 3. The summaries provide the key information about the demand curves, elasticities, and impact of price and income changes for two

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262 views

Learning Assessment M3D

1. The demand function for good A is P = -0.25Q + 575. At a price of P=287.5 and quantity of Qd=1150, total revenue would be at a maximum. 2. For good X: a 5% price increase would decrease demand by 10%; a 10% price increase for substitute good Y would decrease demand for X by 60%; a 3% decrease in income would decrease demand for X by 9%. Good X is elastic, a luxury good, and a strong complement to good Y. 3. The summaries provide the key information about the demand curves, elasticities, and impact of price and income changes for two

Uploaded by

JOHN PAUL MACALLING
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Wong, Michaela Rose C.

Learning Assessment M3D


1798 BEPMC311

PROBLEMS

1. Consider the following: If the price per unit of good A is P200 quantity purchased is
valued at 1,500 units. If price changes (increase or decrease) by P1, quantity demanded
changes (decreases or increases) by 4 units.

Price Qd
200 1500
175 1600
150 1700
125 1800
100 1900
75 2000
50 2100
25 2200

A. Determine the demand function expressed as a price function. (2 points)

Demand P Function:

P P

P – 200 = -0.25Q + 375 P = -0.25Q + 375 + 200

P = -0.25Q + 575

B. Set up a demand schedule for this function and determine the price elasticity of
demand at various P and Qd combinations using point-price elasticity formula.
(Make sure that all elasticity concepts are found on the same demand curve.)
(10 points)

POINT-PRICE ELASTICITY OF DEMAND


DEMAND SCHEDULE SLOPE = -4

P Qd Applying the Point-Price ℇd Type


Elasticity Formula
575 0 α Perfectly Elastic

550 10 |22|
0
525 20 |10.5|
0
500 30 |6.67|
0
475 40 |4.75|
0
450 50 |3.6|
0 Elastic
425 60 |2.83|
0
400 70 |2.29|
0
375 80 |1.88|
0
350 90 |1.56|
0
325 10 |1.3|
00
300 11 |1.09|
00
11 |1| Unitary Elastic
287.5 50
275 12 |0.92|
00
250 13 |0.77|
00
225 14 |0.64|
00
200 15 |0.53|
00 Inelastic
175 16 |0.44|
00
150 17 |0.35|
00
125 18 |0.28|
00
100 19 |0.21|
00
75 20 |0.15|
00
50 21 |0.1|
00
25 22 |0.05|
00
0 23 0 Perfectly Inelastic
00

MID-POINT ARC ELASTICITY

C. Determine the TR and MR functions. (4 points)

TR FUNCTION

TR = P*Q
= (-0.25Q + 575) Q
TR = -0.25Q² + 575Q

MR FUNCTION

MR = dTR/dQ = (1)aQ¹ ֿ ¹ + (2) (-b)Q² ֿ ¹


= (1) 575Q¹ ֿ ¹ + (2) (-0.25) Q² ֿ ¹
MR = 575 – 0.5Q
D. Graph the demand curve and the TR curve (TR curve just below the demand curve)
(6 points)

E. At what P and Qd combination will TR be maximum? (2 points)

TR will be maximum at midpoint of demand curve.

Half of the full range of quantity demanded: 2,300/2 = 1,150

Half of the full range of total revenue: 575/2 = 287.50

 Total revenue will be at maximum at P=287.5 and Qd = 1150


2. Suppose the own price elasticity of demand for good X is –2, its income elasticity is 3,
and the cross-price elasticity of demand between it and good Y is –6.

A. Interpret the elasticity coefficients. (6 points)

1. Own price elasticity of demand coefficient for good X is -2. This means that
for every 1% change (increase or decrease) in P, Qd changes (decrease or
increase) by 2%. Since the absolute value of the coefficient is |2|, the
demand for the good is elastic.

2. Since the income elasticity coefficient is positive, then the good under
consideration (X) is a normal good. The coefficient is also greater than 1,
therefore good X is a luxury good.

3. Since the cross-price elasticity of demand between good X and Y is


negative, good X and Y are inferior complements. Moreover, since the
coefficient are greater than -1, goods X and Y are strong complements.

B. Determine how much consumption of this good will change


if:

B.1 The price of good X increases by 5%. (2 points)

= % change in quantity demanded/% change in price

-2 = (% change in quantity demanded) / (5)

% change in quantity demanded (1) = -2*5

% change in quantity of good X demanded = -10%

 If price of good X increases by 5%, then quantity


demanded will decrease by 10%.

B.2 The price of good Y increases by 10%. (2 points)

= % change in quantity demanded/% change in price

-6 = (% change in quantity demanded) / (10)

% change in quantity demanded (1) = -6*10

% change in quantity of good Y demanded = -60%

 If price of good Y increases by 10%, then quantity


demanded will decrease by 60%. Also, since the
cross-price elasticity between good X and Y is still
greater than -1, good X and Y are strong
complements.
B.3 Income falls by 3%. (2 points)

= % change in quantity demanded/% change in income

3 = % change in quantity demanded / (-3)

% change in quantity demanded (1) = 3 (-3)

% change in quantity demanded = -9%

 If income decreases by 3%, then quantity demanded will


decrease by 9%.

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