ECON 1000 Lecture Notes - Inferior Good, Normal Good

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2 Nov 2011

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The total revenue from the sale of a good or service equals the price of the good multiplied by the quantity sold. A change in the price always creates a change in the quantity sold, however this does not always mean an increase in total revenue. The change in total revenue due to a change in price depends on the elasticity of demand: If demand is elastic, a 1% price cut increases the quantity sold by more than 1% and the total revenue increases. If demand is inelastic, a 1% price cut decreases the quantity sold by more than. If the demand is unit elastic, a 1% cut in the price increases the quantity sold by. A method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change, when all other influences on the quantity sold remain the same.

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In this question, we will determine the price elasticity of demand using both the coefficient of elasticity and the total revenue test.

Use the demand schedule in the table below to answer the following questions.

Quantity Demand	Price
10	200
20	150
30	100
40	50
50	25

a) Calculate the total revenue for each row in the demand schedule. indicate whether total revenue increases or decreases between each row int eh demand schedule. use the total revenue test to classify each price/quantity change as elastic, inelastic, or uni-elastic.

b) calculate the own price-elasticity coefficient for each row in the demand schedule. use the coefficients you calculate to classify each price/quantity change as elastic, inelastic, unit elastic.

in your answer it will be useful to recall that the midpoint formula for percentage change is:

%change midpoint = (final - initial) / ((finial + initial)/2)

and own price elasticity can be calculated by using the formula

Ed= (percentage change in quantity demand of product x) / (percentage change the in the price of product x)

fuchsiacoyote513

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

coffeehornet269

1. Grand TV Manufacturer wants to increase the quantity of TVs it sells by 8%. If the price elasticity of demand is 4, the manufacturer must:

a. decrease price by 1.5%.

b. increase price by 1.5%.

c. increase price by 2.0%.

d. decrease price by 2.0%.

2. Suppose that an Italian ice cream firm is facing a linear demand curve and that the current price for the Italian ice cream is set at a point where the price elasticity is 0.7. If the firm decreases the product price,

Select one:

a. the demand becomes less inelastic, and total revenue increases.

b. the demand becomes more inelastic, and total revenue decreases.

c. the demand becomes more inelastic, and total revenue increases.

d. the demand becomes less inelastic, and total revenue decreases.

3. Suppose that in a month, the price of movie rentals decreases from $3.25 to $3. At the same time, the quantity of movie rentals demanded increases from 100 to 120. The price elasticity of demand for movie rentals (calculated using the midpoint formula) is:

a. elastic.

b. zero.

c. inelastic.

d. unitary elastic.

4. The price elasticity of demand for color printers is 1.6, and you would like to see the quantity demanded of color printers increase by 32%. Then the percentage change in price should be:

Select one:

a. 15%.

b. 25%.

c. 10%.

d. 20%.

5. The price of apple increases from $1 to $1.10. At the same time, the quantity of apples demanded decreases from 100 to 90. The price elasticity of demand for apples (calculated using the initial value formula) is:

a. 0.9.

b. 0.02.

c. 1.1.

d. 1.

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ECON 1000 Lecture Notes - Inferior Good, Normal Good

ECON 1000 Full Course Notes

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