1. Given the following demand schedule:

PRICE | QUANTITY | REVENUE |
---|---|---|

15 | 10 | |

10 | 55 | |

5 | 100 |

a) Fill in the revenue column; without doing any further computations, is the demand curve **elastic** or **inelastic**? Why?

b) Compute the coefficient of elasticity **between** a price of $5 and of $15 using the **midpoint formula**.

2. Company ElastiPad produces tablets competing with the iPad. Six months into the release of their new product, elastoPad, they reduced the price from $200 to $100 to test the market and their theory that they could improve revenues by making the change. It was a huge success! At $200 demand for their elastoPad was 20,000 units, but with the reduced price of $100 demand topped 60,000 units! At $200 revenue was $4 million, whereas at $100 revenue reached $6 million. Using the above midpoint formula, determine if the price change was elastic or inelastic. Show your work.

3.

### PRICE ELASTICITY OF SUPPLY EXAMPLE PROBLEM

Given the following data for the supply and demand of movie tickets, calculate the price elasticity of supply when the price changes from $9.00 to $10.00.

We know that the original price is $9 and the new price is $10, so we have Price (Old) =$9 and Price (New) = $10. From the chart we see that the quantity supplied, when the price is $9 is 75 and when the price is $10 is 105.

**Answer Key**

Total Revenue Column: 150, 550, 500

1a. since revenue increased when price declines, demand will be **elastic**

1b. The percentage change in quantity, using the midpoint formula is: (100 – 10) / 55 = 90/55 = 1.636.

The coefficient of elasticity is the percentage change in quantity divided by the percentage change in price, or – 90/55 = – 1.636. Since this is greater than 1 demand is **elastic **over this range, as we expected from the increase in revenue.

2.

E =

[(60,000 – 20,000) / [(60,000 + 20,000)/2]]

————————————————————

[($200 – $100)/[($200 + $100)/2]]

E = (40,000/40,000) / (100/150)

E = 1 / .67

E = 1.49: This product is considered elastic because E > 1

3.

**Price (Old) = $9
Price (New) = $10
Quantity Supplied (Old) = 75
Quantity Supplied (New) = 105**

To calculate the price elasticity of supply for movie tickets, we need to know what the percentage change in quantity supplied is and what the percentage change in price is.

#### CALCULATING THE PERCENTAGE CHANGE IN QUANTITY SUPPLY

The formula used to calculate the percentage change in quantity supplied is:

**[Quantity Supplied (New) –Quantity Supplied (Old)] /Quantity Supplied (Old))**

**[105 – 75] / 75 = (30/75) = 0.4**

So we note that **% Change in Quantity Supplied = 0.4**

Now we need to calculate the percentage change in price.

#### CALCULATING THE PERCENTAGE CHANGE IN PRICE

The formula used to calculate the percentage change in price is:

**[Price (New) – Price (Old)] /Price (Old))**

By filling in the values we wrote down, we get:

**[10 – 9] / 9 = (1/9) = 0.1111**

We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply.

#### CALCULATING THE PRICE ELASTICITY OF SUPPLY

**PES = (% Change in Quantity Supplied)/(% Change in Price)**

We now fill in the two percentages in this equation using the figures we calculated.

**PEoD = (0.4)/(0.1111) = 3.6**

We get that the price elasticity of supply when the price increases from $9 to $10 is 3.6. So for movie tickets, the price is elastic and thus supply is very sensitive to price changes.

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