1. Explain the relationship between the price elasticity of demand and total revenue.
2. Is the price elasticity of gasoline more elastic over a shorter or a longer period of time? Explain.
3. Determine whether each of the following is an explicit cost or an implicit cost:
a) Payments for rented manufacturing equipment
b) A firm's use of a warehouse that it owns and could rent to another firm
c) Wages paid to the firm's workers
d) The wages the firm's owner could earn if he worked for another company
4. Consider the following information in the table for Pat's Pizza Restaurant and answer the questions below.
Marginal Product of Capital 4,000
Marginal Produce of Labor 100
Wage Rate $10
Rental Price of Pizza Ovens $500
a. Is the owner of Pat's Pizza Restaurant minimizing cost?
b. Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers? Explain.
1. Price elasticity of demand (hereafter ped) describes the responsiveness for prices changes of a particular good/service. It is measure from 0 to minus infinity. A ped between -1 to 0 is known as inelastic and this means that less responsive to price changes (0 is the extreme end, known as perfect inelastic and it means that consumers will not change the amount they purchase no matter how high the price changes to). A ped between -1 to minus infinite is called elastic and it means that consumers are very responsive to price changes (minus infinity is the other extreme end, called perfect elastic and it means that consumers will not buy anything even if the price just goes up by 1 cent).
Numerically, say the ped of some good is -2, this means that when price goes up by, say, 10%, then the quantity sold would decrease by 20%. If the ped of this good is -0.5, this means when price goes up by 10%, then quantity sold would only decrease by 5%.
PED is important for sellers to decide whether or not they can increase their prices ...