# Economics:Demand and supply,price elasticity.

1. Determine the price elasticity of demand at each quantity demanded using the formula: Percentage change in quantity demanded = (Q2-Q1)/Q1 divided by percentage change in price = (P2-P1)/P1

b. Redo exercise 1a using price changes of $10 rather than $5

c. Plot the price and quantity date given in the demand schedule. Indicate the price elasticity value at each quantity demanded. Explain why the elasticity value gets smaller as you move down the demand curve.

D. Plot the total revenue curve directly below the demand curve plotted. Measuring total revenue on the vertical axis and quantity on the horizontal axis.

E. What would a 10% increase in the price of movie tickets mean for the revenue of a movie theater if the price elasticity of demand was .1, .5, 1.0 and 5.0?

F. Using the demand curve plotted illustrate what would occur if the income elasticity of demand was .05 and income rose by 10%. If the income was elasticity was 3.0 and income rose by 10% what would occur?

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#### Solution Summary

The problem set requires the determination of price elasticity at different levels of pricing.

Demand Elasticity

1. Xerox Corporation develops, manufacturers, and services document equipment and software solutions worldwide. Assume the company offered $75 off the $1,475 regular price on the Phaser 6360, a durable high-speed color copier, and Internet sales jumped from 700 units to 800 units per week.

A. Estimate the color copier demand curve, assuming that it is linear.

B. If marginal costs per unit are $650, calculate the profit-maximizing price-output combination.

2. The demand curve for a product is given by Qx = 1,000 - 2(Px) + .02(Pz), where Pz = $400.

A. What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $154?

B. What is the own price elasticity of demand when Px = $354? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $354?

C. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or complements?

3. Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much consumption of this good will change if:

A. The price of good X increases by 5 percent.

B. The price of good Y increases by 10 percent.

C. Advertising decreases by 2 percent.

D. Income falls by 3 percent.

4. For the first time in two years, Big G raised cereal prices by 2 percent. If the volume of cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal?

5. This year was prosperous for Starbucks Coffee. Revenues increased 9 percent. Suppose management attributes this revenue growth to a 5 percent increase in the quantity of coffee sold. If Starbucks' marketing department estimates the income elasticity of demand for its coffee to be 1.75, how will looming fears of a recession (expected to decrease consumers' incomes by 4 percent) impact the quantity of coffee ]Starbucks expects to sell?

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