Microeconomics

4. Consider the following demand schedule:

            price                           quantity demanded                          Elasticity coefficient

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            $25                                         20

             20                                          40

             15                                          60

             10                                          80

             5                                            100

What is the price elasticity of demand between?

(a) P=$25 and P=20?

Price elasticity of demand = -(ΔQd/Qd)/(ΔPd/Pd)

= -[(40 – 20)/20]/[(20 – 25)/25]

= (20/20)/(-5/25)

= -1/(-1/5)

= -(-5)

= 5

(b) P=$20 and P=15?

Price elasticity of demand = -(ΔQd/Qd)/(ΔPd/Pd)

= -[(60 – 40)/40]/[(15 – 20)/20]

= -(20/40)/(-5/20)

= -(1/2)/(-1/4)

= (-1/2)*(-4)

= 4/2

= 2

(c) P=$15 and P=10?

Price elasticity of demand = -(ΔQd/Qd)/(ΔPd/Pd)

= -[(80 – 60)/60]/[(10 – 15)/15]

= -(20/60)/(-5/15)

= -(1/3)/(-1/3)

= (-1/3)/(-1/3)

= 1

(d) P=$10 and P=5?

Price elasticity of demand = -(ΔQd/Qd)/(ΔPd/Pd)

= -[(100 – 80)/80]/[(5 – 10)/10]

= -(20/80)/(-5/10)

= -(1/4)/(-1/2)

= (-1/4)/(-1/2)

= (-1/4)*(-2)

= 0.5

5. Suppose a university raises its tuition from $3000 to $3500. As a result, student enrollment falls from 5000 to 4500, calculate the price elasticity of demand. Is demand elastic, unitary elastic, or inelastic?

Price elasticity of demand = -(ΔQd/Qd)/(ΔPd/Pd)

= -[(3500 – 3000)/3000]/[(4500 – 5000)/5000]

= -(500/3000)/(-500/5000)

= (-5/30)/(-1/10)

= (-1/6)/(-1/10)

= (-1/6)*(-10)

= 10/6

= 1.67

Since 1.67 is greater than 1 then the demand is elastic.

6. Will each of the following changes in price cause total revenue to increase, decrease, or remain unchanged?

(a) price falls, and demand is elastic.

Total revenue increases.

(b) price rises, and demand is elastic.

Total revenue decreases.

(c) price falls, and demand is unitary elastic.

Total revenue is unchanged.

(d) price rises, and demand is unitary elastic.

Total revenue is unchanged.

(e) price falls, and demand is inelastic.

Total revenue decreases.

(f) price rises, and demand is inelastic.

Total revenue increases.

7. Suppose a movie theater raises the price of popcorn 10 percent but customers do not buy any less popcorn. What does this tell you about the price elasticity of demand? What will happen to total revenue as a result of the price increase?

The increase in the price of the popcorn never affects the demand for popcorn. If the price of the popcorn continues to increase and the demand never changes then we can conclude that the demand is perfectly in elastic. Total revenue will increase because the demand never changes. If the price continues to increase and the demand never changes then the total revenue will continue to increase.

16. Opponents of increasing the tax on gasoline argue that the big oil companies just pass the tax along to the consumers. Do you agree or disagree? Explain you answer.

I agree that big oil companies are just passing the tax along to the consumers. There is still a high demand of gasoline in the market. The high demand of gasoline in the market makes it a strong point for the big oil companies to increase the price of the gasoline. If the big oil companies increase their prices, the consumers cannot react to the increase in the price because alternatives for gasoline are hard to obtain. Therefore, increasing the price would mean that the demand will never change and this would mean that the companies will earn more. If they earn more, they can now pay the taxes very easily. They are abusing the high demand for gasoline so that they can pass the burden of paying their taxes to the consumers.

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