# Price Elasticity of Demand and Supply

Six (6) questions on Elasticity of Demand and Supply

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Elasticity Computations

1. Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.25 results in an increase in quantity demanded to 70 units. Show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?

Given:

Q1 = 50

Q2 = 70

P1= 1

P2 = .20

What percentage would a 10 percent rise in the price reduce the qd?

Ep = Q2-Q1/P2-P1 = 70-50/.20-1 =20/.80 = -0.25

A 10% increase in price would result to 25% reduction in the quantity demanded.

2. Fill in the blanks.

P Q Price Elasticity Total Revenue

9 1 9

8 2 -1 16

7 3 -1 21

6 4 -1 24

5 5 -1 25

4 6 -1 24

3 7 -1 21

2 8 -1 16

3. Categories of price elasticity of demand

a. An Ep of 2.5 is Relatively elastic. The firm's ...

#### Solution Summary

The solution computes for the price elasticity of demand and supply. The step-by-step solutions are attached in a 3-page document file.

A tutorial that explains how to calculate the Equilibrium price of a product, cross price elasticity of demand, Income elasticity of Demand and Elasticity of Demand.

The tutorial also explains how to determine the exogenous and endogenous variables in a function.

1. Suppose the market demand curve for a Product is given by Q = 250 - 5P and the market supply curve is given by Q = -50 + 25P.

1. What are the equilibrium price and quantity in this market?

2. At the market equilibrium, what is the price elasticity of demand?

3. Suppose the price in this market is $8. What is the amount of excess demand?

2. Suppose the market demand curve for a product is given by Q = 500 - 156P + 20I and the market supply curve is given by Q = -25 + 10P - 10K. Assume initially that I= 10 and K = 5.

1. What are the equilibrium price and quantity in this market?

2. What are the endogenous and exogenous variables in the equilibrium model?

3. Suppose K suddenly increases to 20. How will this affect the market equilibrium calculated in part 1?

3. Suppose demand for good A is given by Q = 500 - 10Pa + 2Pb + 0.70I where Pa is the price of Good A, Pb is the price of some other good B, and I is income. Assume that Pa is currently $10, Pb is currently $5, and I is currently $100.

1. What is the elasticity of demand for good A with respect to the price of good A at the current situation.

2. What is the cross price elasticity of the demand for good A with repect to the price of good B at the current situation?

3. What is the income elasticity of demand for good A at the current situation.

4. Suppose the market demand curve for a product is given by Q = 500 - 5P and the market supply curve is given by Q = 20P

1. What are the equilibrium price and quantity in this market?

2. Now suppose that the new demand curve for the same product is given by Q = 1000 - 5P and the market supply curve remains unchanged. What are the new equilibrium price and quantity in this market.