Question

a. The following information shows price ($) and quantity demanded thousands per week) for entrance fees for a local attraction: 4 9 Price 0 Demand 10 3 7 5 5 6 4 7 3 8 2 10 0 9 8 6 1 i) Calculate the elasticity of demand at each price level change using the midpoint method. ii) Describe how the elasticity of demand changes with respect to price. 111) Calculate the change in revenue for each price change. iv) Are the changes in revenue from part iii) consistent with the values of elasticity of demand that you calculated in part i)? Parts i) to iv) are worth 1.5 marks each b. Your minister for housing wants to increase the number of privately owned low – rental housing units available by 7 percent. i) If the elasticity of supply of this type of housing has been estimated to be equal to 0.3 over the relevant period, how much is the percentage increase in rent required? (2 marks) 11) If the rent for these units is currently $70 a week what is the increase in rent required? (2 marks)

Answer 1

(Question a)

Using midpoint method,

Elasticity (Ed) = (Change in Q / Average Q) / (Change in P / Average P)

(i)

P	Demand (Q)	Change in Q	Average Q	Change in P	Average P	Ed	|Ed|
0	10
1	9	-1	9.5	1	0.5	-0.05	0.05
2	8	-1	8.5	1	1.5	-0.18	0.18
3	7	-1	7.5	1	2.5	-0.33	0.33
4	6	-1	6.5	1	3.5	-0.54	0.54
5	5	-1	5.5	1	4.5	-0.82	0.82
6	4	-1	4.5	1	5.5	-1.22	1.22
7	3	-1	3.5	1	6.5	-1.86	1.86
8	2	-1	2.5	1	7.5	-3.00	3.00
9	1	-1	1.5	1	8.5	-5.67	5.67
10	0	-1	0.5	1	9.5	-19.00	19.00

(ii)

As price increases (decreases), |Ed| increase (decreases), so demand becomes more elastic (inelastic).

(iii)

TR = P x Q, computed as follows.

P	Q	TR	Change in TR
0	10	0
1	9	9	9
2	8	16	7
3	7	21	5
4	6	24	3
5	5	25	1
6	4	24	-1
7	3	21	-3
8	2	16	-5
9	1	9	-7
10	0	0	-9

(iv)

As price increases, demand becomes more elastic. So a 1% increase in price decreases quantity demanded by more than 1%, and total revenue decreases. This is in confirmation with the table derived in part (c) above.

NOTE: As HOMEWORKLIB's Policy, only the 1st question with multiple sub-parts can be answered. Post Question (b) separately.