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Price Elasticity of Demand and Supply

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Six (6) questions on Elasticity of Demand and Supply

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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.

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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?

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 ...

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