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# The price elasticity of demand

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Please give a short explaination of why the problem is true or false.

a. A firm maximizes its profit at the break even point. Break even point is the point where marginal revenue equals zero. True or false, explain.

b. Firms advertise in order to change price elasticity of demand for their products. However, the higher elasticity would mean a decrease in the marginal revenues. True or false, explain.

c. Demand estimation is made difficult by the fact that customer self-interest often militates against accuracy of demand information gained through consumer interviews. True or false, explain.

d. Production function specifies the maximum output that can be produced given varying degrees of technological progress. True or false, explain.

e. When a firm operates at increasing returns to scale, long run average cost is increasing. True or false, explain.

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#### Solution Preview

a. A firm maximizes its profit at the break even point. Break even point is the point where marginal revenue equals zero. True or false, explain.

Because a firm maximizes profits at the output level where marginal revenue (MR) equals marginal cost (MC). Break even point is the point where the firm generates zero profit.

b. Firms advertise in order to change price elasticity of demand for their products. However, the higher elasticity would mean a decrease in the marginal revenues. ...

#### Solution Summary

The price elasticity of demand and other questions are featured.

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## Economics

Problems:

1)For each of the following cases, calculate the arc price elasticity of demand and state whether demand is elastic, inelastic or unit elastic

a) when the price of milk increases from \$2.25 to \$2.50 per gallon, the quantity demanded falls from 100 gallons to 90 gallons
b) when price of paper book falls from \$7.00 to \$6.50, quantity demanded rises from 100 to 150
c) when the rent on apartments rises from \$500 to \$550, the quantity demanded decreases from 1000 to 950 2)

2. For each of the following cases, calculate the point price elasticity of demand and state whether demand is elastic, inelastic or unit elastic. The demand curve is given by
Qd=5000-50Px

a) The price of product is \$50
b) The price of product is \$75
c) The price of product is \$25

3. For each of the following cases, what is the expected impact on the total revenue of the firm. Explain your answer
a) Price elasticity of the demand is known to be -0.5, and the firm raises the price by 10%
b) Price elasticity of the demand is known to be -2.5, and the firm lowers the prices by 5%
c) Price elasticity of the demand is known to be 1, and the firm raises the prices by 1%
d) Price elasticity of the demand is known to be 0, and the firm raises the prices by 50%

4.The demand curve is given by
Qd=500-2Px
a) What is the total revenue function
b) The marginal revenue function is MR=250-Q
Graph the total revenue function, Demand curve and marginal revenue function c) c) At what price is revenue is maximised, What is the revnue at that point
d) Identify the elastic and inelastic portions of demand curve

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