Question

7. Use the demand curve below to answer the following questions: Price (dollars) O 350 600 889 1,000 1,700 2,000 Quantity demanded 4. The interval elasticity of demand over the price range $2 to $4 is b. The interval elasticity of demand over the price range $8 to $9 is c. The interval elasticity of demand over the price range $14 to $16 is 8. a. For the linear demand curve in Technical Problem 5, compute the price elasticity at each of the price points given in the following table. Make the elasticity calculations using the two alternative formulas, E=(AQ/AP) (PIQ)and E=P/(P-4). Price Point E= P-A 8.50 11.50 18 b. Which formula is more accurate for computing price elasticities? Explain.

Answer 1

7)a) Interval elasticity is given by

Ed= (∆Q/∆P)*Average P/Average Q

When price changes from $2 to 4

Ed= (2000-1700)/(2-4)*(2+4/2)/(2000+1700/2)

= 300/(-2)*(3/1850)

=(-)450/1850

=(-)0.24

b) When price changes from 8 to 9

Ed= (1000-889)/(-9+8)*(9+8/2)/(1000+889/2)

= (111/-1)*(8.5)/(944.5)

= -0.99

c) When the price changes from 14 to 16$

Ed= (600-350)/(14-16)*(14+16/2)/(600+350/2)

= (250/-2)*(15/475)

= (-)3.94