Price elasticity of demand
- Price elasticity (midpoint)
- E = (ΔQ/Q̄)/(ΔP/P̄)
- Elastic / inelastic
- |E| > 1 elastic, |E| < 1 inelastic
- Revenue
- TR = P·Q
Microeconomics: cram pack
Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Price elasticity of demandMedium
When the price of a ticket changes from €8.00 to €9.50, weekly sales change from 500 to 440. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €8.00P2 = €9.50Q1 = 500Q2 = 440
E =
2.Price elasticity of demandHard
The demand for a product is Q = 400 − 8P, with P in euros. Find the price elasticity of demand E at a price of €35.
Q = 400 − 8PP = €35
E =
3.Economics conceptsMedium
A currency depreciation tends to:
- AHave no effect on trade
- BMake exports cheaper abroad and imports more expensive
- CMake imports cheaper
- DReduce the price of all domestic goods and make imports cheaper
4.Economics conceptsHard
Why is the real-world government spending multiplier usually smaller than the simple 1/(1 − MPC)?
- AThe MPC is always above 1
- BGovernments cannot borrow money
- CTaxes, imports and crowding out leak part of each round of spending
- DConsumers never spend extra income
3Solutions
1.Price elasticity of demand
Answer: E = −0.7447
Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.
Relative change in quantity
(440 − 500)/((500 + 440)/2) = −60/470 = −0.1277
Relative change in price
(9.5 − 8)/((8 + 9.5)/2) = 1.5/8.75 = 0.1714
Elasticity
E = −0.1277/0.1714 = −0.7447
Answer
E = −0.7447
2.Price elasticity of demand
Answer: E = −2.333
Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.
Quantity at this price
Q = 400 − 8·35 = 120
Point elasticity
dQ/dP = −8
E = (dQ/dP)·P/Q = −8·35/120 = −2.333
Answer
E = −2.333
|E| > 1: demand is elastic.
3.Economics concepts
Answer: B · Make exports cheaper abroad and imports more expensive
Why this is the answer
A weaker currency improves export competitiveness and raises import prices, which can increase inflation.
Answer
B · Make exports cheaper abroad and imports more expensive
4.Economics concepts
Answer: C · Taxes, imports and crowding out leak part of each round of spending
Why this is the answer
Income taxes, spending on imports, higher interest rates (crowding out) and saving reduce the extra spending in each round, so the multiplier shrinks.
Answer
C · Taxes, imports and crowding out leak part of each round of spending
ExamProblems · examproblems.com/courses/microeconomics