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 €8.50, weekly sales change from 500 to 450. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €8.00P2 = €8.50Q1 = 500Q2 = 450
E =
2.Price elasticity of demandHard
The demand for a product is Q = 80 − 4P, with P in euros. At which price P is the price elasticity of demand equal to −1.5?
Q = 80 − 4PE = −1.5
P = €
3.Economics conceptsMedium
A country has 950 employed people and 50 unemployed people seeking work. Its unemployment rate is:
- A50%
- B5.3%
- C95%
- D5%
4.Economics conceptsHard
A deadweight loss represents:
- ALosses made by firms that are forced to leave the market in the long run
- BThe profit of a monopolist
- CThe loss of total surplus when output differs from the efficient level
- DThe tax revenue collected by the government
3Solutions
1.Price elasticity of demand
Answer: E = −1.737
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
(450 − 500)/((500 + 450)/2) = −50/475 = −0.1053
Relative change in price
(8.5 − 8)/((8 + 8.5)/2) = 0.5/8.25 = 0.06061
Elasticity
E = −0.1053/0.06061 = −1.737
Answer
E = −1.737
2.Price elasticity of demand
Answer: P = 12 €
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.
Elasticity as a function of price
E = −4P/(80 − 4P)
Solve for P
−4P = −1.5·(80 − 4P)
P·(−4 − 6) = −120 → P = €12.00
Answer
P = €12.00
Check: Q = 32, E = −4·12/32 = −1.5.
3.Economics concepts
Answer: D · 5%
Why this is the answer
The labour force is 950 + 50 = 1,000, so the rate is 50 / 1,000 = 5%.
Answer
D · 5%
4.Economics concepts
Answer: C · The loss of total surplus when output differs from the efficient level
Why this is the answer
Deadweight loss is the reduction in combined consumer and producer surplus caused by distortions such as taxes, monopoly or price controls.
Answer
C · The loss of total surplus when output differs from the efficient level
ExamProblems · examproblems.com/courses/microeconomics