Question

1. You find the following data on the demand for Compact discs in the city. Price (s) Quantity demanded (I Quantity demanded (I - $10,000) |- $12,000) 45 2. Use the midpoint method to calculate the elasticity-price of the demand when the price of CDs increases from $8 to $10, if 1) I is $10,000 and 2) I is $12,000. Briefly explains the result obtained in 1) and 2). 3. Calculate the elasticity-revenue of demand when income increases from $10,000 to $12,000 if 1) Px $12 and P x $16. Briefly explains the result obtained in 1) and 2).

Answer 1

2) 1 )elasticityfrom midpoint method,

e={(q2-q1)/(q2+q1)/2}/{(p2-p1)/(p2+p1)/2}

q2-q1=32-40=-8

(Q2+q1)/2=(32+40)/2=72/2=36

P2-p1=10-8=2

(P2+p1)/2=(10+8)/2=18/2=9

e={(-8/36)/(2/9)}=-72/72=-1

2)2)q2-q1=45-50=-5

(Q2+q1)/2=(50+45)/2=95/2=47.5

P2-p1=10-8=2

(P2+p1)/2=18/2=9

e={(-5/47.5)/(2/9)}=-45/95=-0.47

The elasticity with income 10,000 is high compare to elasticity with income 12000 of same price change.

3).income elasticity=% change in DEMAND/% change in income

1) p=12

%change in income=(2000/10,000)*100=20%

%change in QUANTITY demanded=(6/24)*100=25%

Income elasticity=25%/20%=5/4=1.25

2) p=16

%change in income=20%

%chamge in QUANTITY demanded=(4/8)*100=50%

Income elasticity=50%/20%=5/2=2.5

At higher price ,there is higher income elasticity of same income change.