Question

es lo 514. What is the news and Od? What type of disequilibrium situation exists, and what is its maumitude Briefly describe what will happen to bring the market back to equilibrium. 2) Price Elasticity of Demand (5 points) When the price of Java Joe's lattes decreased from $5.00 to $4.50, the quantity of lattes sold increased from 30 to 40 lattes per day. a Calculate the price elasticity of demand for Java Joe's lattes. b. Interpret this result: is demand for lava loe's lattes elastic, inelastic, or unit elastic? Why? Thinking about the determinants of PED. list at least two that might explain the elasticity you calculated/interpreted above. Briefly explain each. 3) PED and Total Revenue (7 points) A demand curve is represented by the equation P-60 - 20. The price has changed from $40 to $30. a. Graph this demand curve, labeling the two price points and their corresponding quantities demanded. (Hint: In addition to using the graph, you may also use the demand equation to find the quantities demanded for each price point.) b. On your graph, draw and label the total revenue, price effect and quantity effect as price changes from $40 to $30. C. Which effect from (a) is larger? What does that tell us about the effect of the price change on Total Revenue? Explain briefly how you know this is the case without necessarily calculating total revenue. d. Calculate the Total Revenue before and after the price change (at P=$40 and $30). Does this confirm your answer from part (b)? What does this tell us about the elasticity of demand between these points? e. Calculate the elasticity of demand between these points and briefly interpret. Does this confirm your answer from (d)?

Answer 1

P = 60-20 Pº - $40 p'=$30.3 when pc $40 40 - 60 -20 . 20 = 20 0=10 when p'= $30 30=60-28 20 = 30 Q -15 D CI → F 10 is 20 30 . go ! 6) 1 Total renenue at price = $40 is area of ABCD Total renenue at puice & $.50 is area of GEFD buie effect = È falls from $40 to $30 (area ABHG) Quantity but = Q risis from 10 to 15. Carea HEFC) Scanned with CamScanner

c) bruce set & Quantity effect This intitutively imples that total renenue will Increase : VAA Freuiteret op Puice effet is the loss of Menenure -the original quanity at a lower price from selling Quanity affect is the addud munenue earned at the new puce on the newly induced units sold. d) Total Revenue (lepore thange) = 40810 = $400 Total Revenue (after change) = Box 15 = $450 free When Price to, aty a But suice Change in only to change in - mo piatas orain > loss - Dimand is Belastic Price elastity = % change in aty demanded % change in fence AQ= 15-10=5 AP=% -40 =HIO tly = 6 x 40 c.ch 11 Suice Glasticity 761 clemand is elastice Scanned with CamScanner

When price and total revenue move in the same direction, demand is inelastic.

When price and total revenue move in opposite direction, demand is elastic.

Here, price is falling but total revenue is increasing, so demand is elastic.

Let me know if anything is unclear :)