CQD7001 Economics for Management

Demand Elasticity
Group 3

Wucheng Li S2143257
Liying Zhang S2135138
Mengnan Song S2115998
Question 1
For each of the following cases, calculate the arc price elasticity of demand, and state whether
demand is elastic, inelastic, or unit elastic
Arc Elasticity of Demand =(    Q/   P)× （ P1 ＋ P2 ） / （ Q1 ＋ Q2 ）       
    
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
=(    Q/   P)× （ P1 ＋ P2 ） / （ Q1 ＋ Q2 ）
=(90-100)/(2.5-2.25)×((2.25 ＋ 2.5)/(100+90))
= -1                   |ep|=1     Unitary Elastic

b. When the price of paperback books falls from $7.00 to $6.50, the quantity demanded rises from 100 to
150.
=(    Q/   P)× （ P1 ＋ P2 ） / （ Q1 ＋ Q2 ）
=(150-100)/(6.5-7.0)×((7 ＋ 6.50/(100 ＋ 150))
=-5.4                 |ep| ＞ 1       Elastic
Question 1
c. When the rent on apartments rises from $500 to $550, the quantity demanded decreases from 1,000 to 950.
=(    Q/   P)× （ P1 ＋ P2 ） / （ Q1 ＋ Q2 ）
=(950-1000)/(550-500)×((500+550)/(1000+950))
=-0.54             |ep| ＜ 1    Inelastic 
 Question 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 = 5, 000 − 50Px
a. The price of the product is $50.
b. The price of the product is $75. 
c. The price of the product is $25. 

Point price elasticity : ep=p/(p-a)           P: Price of good    a: the vertical intercept in curve

Setting QD=0                     0=5000-50Px                     Px=100 ( vertical intercept =100)

a. When p=50                                                   b. When p=75

ep=50/(50-100)=-1                                          ep=75/(75-100)=75/-25=-3
|ep|=1  Demand is Unit elastic                         |ep| ＞ 1      Demand is elastic

c. When p=25
ep=25/(25-100)=-0.33
|ep| ＜ 1 Demand is inelastic
Question 3
For each of the following cases, what is the expected impact on the total revenue of the firm?

a. Price elasticity of demand is known to be -0.5, and the b. Price elasticity of demand is known to be -2.5, and the
firm raises price by 10 percent. firm lowers price by 5 percent.

Inelastic Demand: |ep| < 1, a higher price will Elastic Demand: |ep| > 1, a lower price will
increase total revenue. increase total revenue.

c. Price elasticity of demand is known to be -1.0, and the d. Price elasticity of demand is known to be 0, and the firm
firm raises price by 1 percent. raises price by 50 percent.

Unitary Elasticity: |ep| = 1, a higher price will Perfectly Inelastic Demand: |ep| = 0, a higher
lead to no change in the total revenue. price will lead to an increase in the total revenue
by the same amount with the increase of price
(50%).
Question 4
The demand curve is given by  QD = 500 − 2PX

a. What is the total revenue b. The marginal revenue function is MR = 250−Q. 

function? Graph the total revenue function (TR), the demand curve(DC),
and the marginal revenue function (MR).

QD = 500 - 2PX PX = 250 – (QD / 2) $

31250

TR = (P)(Q)
= (PX)(QD) 250
TR
= { 250 – (QD / 2) } (QD)
DC
= 250QD – (QD² / 2)
MR
0 250 500 Quantity
Question 4
The demand curve is given by  QD = 500 − 2PX

c. At what price is revenue maximized, d. Identify the elastic and inelastic regions of the demand
and what is revenue at that point? curve.

When MR = 0 TR is maximum.
Price
MR = 250 – Q Q = 250
250 Elastic Region
TR = 250QD – (QD² / 2)
= 250 × 250 – (250² / 2)
Unit Elastic
= 31250 125
Inelastic Region
P = TR / Q Revenue is maximized
= 31250 / 250 when the price is 125, DC
at 31,250.
= 125 0 250 500 Quantity
Question 5 Based on the information, what can you determine about consumer demand for your
product?

The cross-price elasticity of

demand between your good and
The price elasticity of The income elasticity of a related good is -3.5.
demand is -2.0. demand is 1.5.

a b c

|ep|=|-2.0|=2 ＞ 1 eI=1.5 ＞ 1 The cross elasticity of demand

here is -3.5. So, the product is
complementary. if the price of
So, it is an elastic So, it is positive product X increases then not
demand, which and great than 1, only does the demand for X
means a small which means the decrease but also decreases
change in price due product is luxury the demand for the
to a higher change good. complementary product Y.
in the quantity
demanded.
Question 6 Suppose each of the following cases increases your quantity demanded for Good X by
20 percent. What can you determine about your demand for Good X from the
information?

The price of Good X decreases by 22 percent.

a.

Your income increases by 25 percent.

The price of Good Y increases by 10 percent. b.

c.
Your income increases by 25 percent.
 a. The price of Good X decreases by 22 percent.

%change in quantity demanded of good X

Price elasticity of good X =
%change in price of good X

From the question, we know the %change in quantity demanded of good X =+20%

So, the price elasticity of good X= 20÷(-22) ≈ -0.91

Since |-0.91| = 0.91 less than 1, the demand for good X is inelastic.

 b. The price of Good Y increases by 10 percent.

%change in quantity demanded of good X

Cross-price elasticity =
%change in price of good Y

So, the cross-price elasticity = 20÷10 = 2

Since cross-price elasticity is positive, good X and good Y are substitutes. So that if Y gets more expensive,
people are happy to switch to X.
 c. Your income increases by 25 percent.

%change in quantity demanded of good X

Income elasticity of demand =
%change in income

So, the Income elasticity = 20÷25 = 0.8

Since income elasticity is positive, good X is a normal good. Further, since elasticity is less than 1, good is a
necessity.
Group 3