Economics

ECO 111-002

28

Pg. 110 (2a, 2b, 4, 6a)

2a(i).

PED=Ed=(∆Qd)/(∆P)=[ (Q2-Q1)/((Q2+Q1)/2) ] / [ (P2-P1)/((P2+P1)/2) ]

PED=Ed=[ (1,900-2,000) / (1950) ] / [($250-$200)/($225)] = [(-100)/(1950)] / [($50) /($225)]= - 0.2308

2a(ii).

PED=Ed=(∆Qd)/(∆P)=[ (Q2-Q1)/((Q2+Q1)/2) ] / [ (P2-P1)/((P2+P1)/2) ]

PED=Ed=[ (600-800) / (700) ] / [($250-$200)/($225)] = [(-200)/(700)] / [($50) /($225)]= - 1.2857

2b.)Price elasticity of demand (PED) is a measure of how much the quantity demanded of a good responds to a change in the price of that good. When the price of airline tickets increases, vacationers will not travel as much as they used to. However, the majority of business travelers will continue to travel when the price of airline tickets increase, because they may not have a choice. Business travelers may rely on airplanes as their source of transportation. Therefore, the price elasticity demanded will be greater for vacationers than business travelers. Their will be a greater change in the quantity demanded of airline tickets by vacationers than business travelers.

4.) If the quantity demanded of a good decreases by 30%, while the total revenue of that good increases by 15%, then the demand curve would inelastic. It is said to be inelastic if the quantity demanded decreases and the revenue increases. The demand curve is said to be elastic if the quantity demanded decreases and the revenue decreases.

6ai.) To use the midpoint method to calculate the price elasticity of demand, I found the number in between Q2 and Q1 and the same of P1 and P2. I then took that number and replaced it with the average of the Q2 and Q1, and for P1 and P2. Essentially, the number found using the midpoint method is the same as the average.

[(32-40) / (36)] / [($10-$8) / ($9)]= [(-8)/(36)]/[(2) / (9)]= - 1.0000

6ii.) [(45-50) / (47.5)] / [($10-$8) / ($9)]= [(-5)/(47.5)] / [(2) / (9)]= - 0.4737