Question

In: Economics

4. Suppose the demand curve for cantaloupes P = 120 – 3Qd Where P is the...

4. Suppose the demand curve for cantaloupes P = 120 – 3Qd Where P is the price per pound (in cents) of a cantaloupe and Qd is the quantity demanded per year (in millions of pounds). Suppose the supply curve for cantaloupes is P = 5Qs Where P is the price per pound (in cents) of a cantaloupe and Qs is the quantity supplied per year (in millions of pounds). What is the equilibrium price per pound of cantaloupe? What is the equilibrium quantity of cantaloupe produced? Graph each curve. 5. Using the midpoint formula and the demand curve described in problem 4, calculate the price elasticity of demand for the line segment Q=15 to Q=16. 6. Using the revenue test and the demand curve described in problem 4, determine whether the line segment (q=14 to q=15) is in the elastic or inelastic portion of the demand curve.

Solutions

Expert Solution

The price elasticity of demand measures the percentage change in demand due to percentage change in price. The responsiveness of quantity demanded to the price can be categorized in five different groups.

  • When quantity demanded is completely unresponsive to demand, it is called the perfectly inelastic demand. The elasticity is equals to zero.
  • When a change in quantity demanded is less than the change in price, it is called the inelastic demand. The elasticity lies between 0 to -1.
  • When a change in quantity demanded is equal to the change in price, it is called the unitary elastic demand. The elasticity is equal to -1.
  • When a change in quantity demanded is greater than the change in price, it is called the elastic demand. The elasticity lies between -1 to -∞.
  • When quantity demanded is completely responsive to demand, that is a marginal change in price change the quantity demanded to ∞, it is called the perfectly elastic demand. The elasticity is equals to -∞.

Then in this case as ed<-1, then the elasticity lies between 0 to -1 and hence the line segment is on the inelastic part of the demand curve.


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