Question

The following table represents a student’s demand schedule for Starbucks that is available off campus.

Product Price	Quantity Demanded	Total Revenue
$14	3
12	6
10	9
8	12
6	15
4	18
2	21

A)Fill in the table and graph the demand curve and the total revenue curve on two separate graphs

B)Based on your previous answer, use the midpoint formula to calculate the price elasticity of demand for price changes on the upper and lower end of the demand curve.

C)What is the special relationship between unit elasticity and total revenue?

D)What is the formula for income elasticity of demand? What is the interpretation of income elasticity when the coefficient (Ei) is positive and/or negative?

E)What is the formula of cross elasticity of demand? What is the interpretation of cross elasticity when the coefficient (Exy) is positive and/or negative?

Answer 1

Product Price	Quantity demanded	Total Revenue
14	3	42
12	6	72
10	9	90
8	12	96
6	15	90
4	18	72
2	21	42

b.Mid point Elasticity for changes on the upper end of the demand curve

={(Q2-Q1)/[(Q2+Q1)/2]}/{(P2-P1)/[(P2+P1)/2]}

Q2= 3, Q1=6

P2= 14, P1=12

E= {-3/4.5}/{2/13} = -4.3

Mid point Elasticity for changes on the upper end of the demand curve:

Q2= 18, Q1=21

P2= 4, P1=2

E= {-3/19.5}/{2/3} =0.23

c.If there is unit elasticity of demand then there is no change total revenue. Because the percentage change in quantity demanded is equal to percentage change in price and they offset each other.

d. Formula for income elasticity of demand is :

Ei =Percentage change in quantity demanded of the product/ Percentage change in income of the consumer

Ei =

Where = change in quantity

= change in income

I = original income

Q = original quantity

When the coefficient Ei is negative it means the good is an inferior good. When the coefficient Ei is positive it means the good is a normal good.

e. Formula for cross elasticity of demand is:

Exy = Percentage change in quantity demanded of product X/Percentage change in Price of Product Y

Exy =

Where, is change in quantity demanded of Product X

is the change in price of product Y

Py is original Price of product Y

and Qx is original Quanttity demanded of Product X

If cross elasticity of demand is negative, this means that the products X and Y are complements and if it is positive it means that the goods and Y are substitutes.