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Economics Price Elasticity of Demand

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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 1x106 0
9 5 4.9999.... 10 1x109
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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See the attached file for the table.
NOTES:
1. The cells in RED were converted. Just click on any of these cells to view how they were converted in the formula bar. The conversion was made for easier computation
2. YELLOW cells contain formulas
3. I couldn't put the currency symbol since there is no data available

COLUMNS
I: I designed the worksheet ...

Solution Summary

The solution discusses the economics of price elasticity of demand.

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See Also This Related BrainMass Solution

Economics - Price Elasticity of demand

Suppose that the current market price of VCRs is $300, that the average consumer disposable income is $60,000, and that the price of DVDs (a substitute for VCRs) is $500. Under these conditions annual U.S. demand for VCRs is 10 million per year. Statistical studies have shown that for VCRs the own-price elasticity of demand is -1.5. The income elasticity of demand for VCRs is 2.0. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.8. Use this information to predict the annual number of VCRs sold under the following conditions:

a. Increasing competition from Asia causes VCR prices to fall to $270 with income and the price of DVDs is unchanged.

b. Income tax reductions raise average disposable personal income by 5% with prices unchanged.

c. An inventor in Menlo Park invents a cheaper way to produce DVDs, reducing the price of a DVD by 20% to $400, with the price of VCRs and income unchanged.

d. Which of the above changes lead to a shift in the demand curve and which lead to a movement along the demand curve?

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