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Price Quantity Demanded Quantity Demanded

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					Price         Quantity Demanded     Quantity Demanded
        (income= 10,000)      (income =$12,00)
$8         40             50
10         32             45
12         24             30
14         16             20
16          8            12

a. Use midpoint method to calculate your price elasticity of demand as the price of
compact discs increases from $8 to $10 if (i)your income is 10,000 (ii) your income is
12,000.
b. Calculate your income elasticity of demand as your income increases from $10,000
to $12,00 if (i) the price is $12 and (ii) the price is $16.

                                        Solution

                              (Q2  Q1 )
                              (Q2  Q1 )
 Price Elasticity of Demand =      2
                               (P2  P1 )
                               (P2  P1 )
                                   2

a-i) Income – 10,000:

                              (32  40)
                              (32  40)
                                  2       0.222
 Price Elasticity of Demand =                    1
                                (10-8)    0.222
                               (10  8)
                                  2

a-ii) Income = 12,000:


                              (45  50)
                              (45+50)
                                  2       0.105263
 Price Elasticity of Demand =                       0.47368  0.47
                                (10-8)      0.222
                               (10  8)
                                  2
                              (Q2  Q1 )
                              (Q2  Q1 )
Income Elasticity of Demand =     2
                              (Y2 Y 1 )
                              (Y2 Y 1 )
                                  2

b-i) Price is $12:


                                     (30-24)
                                    (30+24)
                                        2         0.222
  Income Elasticity of Demand =                         1.22
                                (12,000-10,000) 0.1818
                                (12,000+10,000)
                                        2
b-ii) Price is $16:

                                   (12-8)
                                   (12+8)
                                      2         0.4
Income Elasticity of Demand =                        2.2
                              (12,000-10,000) 0.1818
                              (12,000+10,000)
                                      2