Question

1. The following table shows the demand schedule for video games. Price (per unit) Quantity Demanded (per year) Total Expenditure A $30 400 000 B 35 380 000 C 40 350 000 D 45 320 000 E 50 300 000 F 55 260 000 G 60 230 000 H 65 190 000

a. Compute the total expenditure for each row in the table.

b. Compute the price elasticities of demand between A and B, C and D, E and F, and G and H.

2. Suppose the market for frozen orange juice is in equilibrium at a price of $2.00 per can and a quantity of 4200 cans per month. Now suppose that at a price of $3.00 per can, the quantity demanded falls to 3000 cans per month and the quantity supplied increases to 4500 cans per month.

a. Calculate the price elasticity of demand for frozen orange juice between the prices of $2.00 and $3.00. Is demand elastic or inelastic?

b. Calculate the price elasticity of supply for frozen orange juice between the prices of $2.00 and $3.00. Is supply elastic or inelastic?

Answer 1

	Price $	Quantity demanded	Total expenditure $
A	30	400	12000
B	35	380	13300
C	40	350	14000
D	45	320	14400
E	50	300	15000
F	55	260	14300
G	60	230	13800
H	65	190	12350

1.

a) Price elasticity of demand (PED)= % change in quantity demanded /% change in price of the good.

Price elastic of demand

Between points A and B.

Old quantity =   400             Old price= $30

New quantity = 380             New price $35

% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

% change in quantity demanded= ((380-400)/400)) x100

                                                         =( -20/400) x100

                                                       = -5%

% change in price = ((New price-old price)/old price)) x 100

                                 =(($35-$30)/100) x100

                                 = (5/30) x 100

                                 = 16.67%

Price elasticity of demand = -5%/16.67%=-0.3. PED is 0.3. PED is inelastic as it is <1.

Between points C and D.

Old quantity =   350             Old price= $40

New quantity = 320            New price $45

% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

% change in quantity demanded= ((320-350)/350)) x100

                                                         =( -30/350) x100

                                                       = -8.57%

% change in price = ((New price-old price)/old price)) x 100

                                 =(($45-$40)/100) x100

                                 = (5/40) x 100

                                 = 12.50%

Price elasticity of demand = -8.57%/12.50%=-. PED is -0.69. PED is inelastic as it is <1.