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Satisfactory Essays
Professor C.L. Ballard
Fall Semester 2012

Economics 201, Sections 1 and 2
Answer/Discussion of Problem Set 4
Elasticity

1. The price of Good X decreases from $1.10 per unit to $0.90 per unit. As a result, the quantity demanded increases from 800 units per week to 1200 units per week. What is the own-price elasticity of demand for Good X? a. Zero b. 0.5 c. 1.0 d. 2.0 e. 2.75

Answer: d. The own-price elasticity of demand is the proportional change in quantity demanded, divided by the proportional change in price: e = (ΔQd/Qd) / (ΔP/P). Quantity demanded increases from 800 to 1200. Thus the change in quantity demanded, ΔQd, is (1200 – 800) = 400. To get the proportional change in quantity demanded, we have to divide ΔQd by the reference level of Qd. Our rule is to use the average of the beginning and ending values as the reference level. Thus Qd is the average of 1200 and 800, which is 1000. If we then divide ΔQd by Qd, we have 400/1000 = 0.4. Price decreases from $1.10 to $0.90. This is actually a negative change, but our rule is to use absolute value. Thus the change in price, ΔP, is $(1.10 – 0.90) = $0.20. For price, as for quantity demanded, we use the average of the beginning value and the ending value as the reference level. Thus P is the average of $1.10 and $0.90, which is $1.00. If we then divide ΔP by P, we have $0.20/$1.00 = 0.2. Now we are ready to find the elasticity, by dividing the proportional change in quantity demanded by the proportional change in price: 0.4/0.2 = 2.0.

2. The own-price elasticity of demand for Belgian endive is 1.5. The price of Belgian endive increases by 10%. As a result of the increase in price, what will happen to quantity demanded? a. Quantity demanded will fall by 1.5%. b. Quantity demanded will fall by 6.666%. c. Quantity demanded will fall by 10%. d. Quantity demanded will fall by 15%. e. Quantity demanded will remain unchanged.

Answer: d. The

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