Question

The data below represents a demand schedule.

Product Price ($)	Quantity Demanded
6	0
5	1
4	2
3	3
2	4
1	5
0	6

In the diagram below, draw a demand curve.

Use the line tool to graphically show Demand. This line should only contain the two endpoints.

Use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes.

Instructions: Input the your answers as positive values (absolute values). Round your answers to two decimal places.

Moving from $5 to $4: Ed =

Moving from $4 to $3: Ed =

Moving from $3 to $2: Ed =

Moving from $2 to $1: Ed =

b. What can you conclude about the relationship between the slope of the above demand curve and its elasticity?

The demand curve above has a constant slope of (Click to select)-11∞0, but elasticity (Click to select)increasesdecreases as we move down the curve.

c. Explain in a nontechnical way why demand is elastic in the upper left segment of the demand curve and inelastic in the lower right segment.

Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.

	When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic
	When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic
	When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand elastic
	When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand inelastic

Answer 1

The demand graph is as below.

(a) The midpoint method of elasticity would state price elasticity as .

Moving from $5 and 1 unit to $4 and 2 unit, the elasticity would be or or or .

Moving from $4 and 2 unit to $3 and 3 unit, the elasticity would be or or or .

Moving from $3 and 3 unit to $2 and 4 unit, the elasticity would be or or or .

Moving from $2 and 4 unit to $1 and 5 unit, the elasticity would be or or or .

(b) The slope of the demand curve is . The elasticity indeed changes while the slope is constant, as is the usual case in linear demand curve. Also, above the midpoint of demand curve, the elasticity is more in absolute terms than the demand slope in absolute terms (3, 1.4 > 1), while below the midpoint of demand curve, the elasticity is less in absolute terms than the demand slope in absolute terms (0.7143,0.3333 < 1). The elasticity tends towards the slope of the demand curve from both sides, is equal at the midpoint of the demand curve.

(c) In the upper segment of graph, the percentage change in quantity demanded would be more than the percentage change in price, as demand units would be close to zero, while price would be at maximum. Similarly, in the lower segment of graph, the percentage change in quantity demanded would be less than the percentage change in price, as demand units would be at maximum, while price would be close to zero.

The correct options would be

• When the initial P is high and Q is low, a unit change in P is a low percentage change, while a unit change in Q is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic.
• When the initial P is low and Q is high, a unit change in P is a high percentage change, while a unit change in Q is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic.

The reason being that elasticity greater than 1 is when the percentage change in quantity exceeds the percentage change in price, which makes the demand elastic; and elasticity less than 1 is when the percentage change in quantity is less than the percentage change in price, making the demand inelastic.