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# Elasticity of demand and price changes

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2) The initial price of a cup of coffee is \$1, and at that price, 400 cups are demanded. If the price falls to \$0.90, the quantity demanded will increase to 500.

a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know.

3) The following are the actual sales for the last six periods:
Period Sales 3MMA
1 750 -----
2 820 723
3 600 757
4 850 783
5 900 817
6 700 ------
a) Calculate the 3 month moving average (3MMA)

b) Using the 3-month moving average, what would be your prediction for period 7?

4) a- Define returns to scale.
b-Why this is considered a long run phenomenon?

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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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