a. Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C, and the price elasticity of demand for D2 between point A and point B. Which demand curve is more elastic, D1 or D2? Briefly explain. b. Suppose Yo PDF

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a. Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C, and the price elasticity of demand for D2 between point A and point B. Which demand curve is more elastic, D1 or D2? Briefly explain. b. Suppose Yo...

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Vincent Saw Yong Kang

Tutorial 3

ECON100

Question 4

Use the following graph for Yolanda’s Frozen Yoghurt Stand to answer the questions that follow.

a.

Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C, and the price elasticity of demand for D2 between point A and point B. Which demand curve is more elastic, D1 or D2? Briefly explain.

b.

Suppose Yolanda is initially selling 200 cones per day at a price of $3.00 per cone. If she reduces her price to $2.50 per cone and her demand curve is D1, what will be the change in her revenue? What will be the change in her revenue if her demand curve is D2?

Vincent Saw Yong Kang

Tutorial 3

ECON100

a) Calculate the price elasticity along D1 between points A and C: Percentage change in quantity demanded = (300 - 200) / ((300 + 200) / 2) = (300 - 200) / 250 100 = 40.00% Percentage change in price = ($2.50 - $3.00) / (($2.50 - $3.00) / 2) = ($2.50 - $3.00) / $2.75 100 = 18.2% So, the price elasticity of demand = 40.00% / -18.20% = -2.2 Similarly, the price elasticity of demand along D2 between points A and B can be calculated as: Percentage change in quantity demanded = (225 - 200) / ((225 + 200) / 2) = (225 - 200) / 212.5 100 = 11.80% Percentage change in price = ($2.50 - $3.00) / (($2.50 + $3.00) / 2) = ($2.50 - $3.00) / $2.75 100 = 18.20% So, the price elasticity of demand = 11.80% / -18.20% = -0.65 Because the quantity response is much larger for the same price out, demand curve D1 is much more elastic. b) Along D1, revenue increases from $3 x 200 =$600 to $2.50 x 300 = $750. Revenue rises by $150 as the price is cut because the demand curve is elastic. Along D2, revenue falls from $600 to $2.50 x 225 = $562.50. Revenue falls by $37.50 as the price is cut because D2 is inelastic....