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
A product sells 2 500 units per month at €8. Its price elasticity of demand is −2. The firm changes the price by −20%. Assuming %ΔQ = E·%ΔP, by how much ΔR does monthly revenue change?
P1 = €8Q1 = 2 500E = −2%ΔP = −20%
ΔR = €
2.Price elasticity of demandHard
The demand for a product is Q = 1000 − 20P, with P in euros. Find the price elasticity of demand E at a price of €38.
Q = 1000 − 20PP = €38
E =
3.Economics conceptsMedium
A price ceiling set below the equilibrium price typically causes:
- ANo change in the market
- BA surplus
- CA shortage
- DAn increase in supply
4.Economics conceptsHard
The Coase theorem states that, if property rights are clearly defined and transaction costs are low:
- APrivate bargaining can reach an efficient outcome regardless of who holds the rights
- BExternalities cannot be corrected without direct government regulation or a Pigouvian tax
- CThe polluter must always compensate the victim
- DGovernments must always tax externalities
3Solutions
1.Price elasticity of demand
Answer: ΔR = 2400 €
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.
New price and quantity
P2 = 8·0.8 = €6.40
Q2 = 2 500·1.4 = 3500
Change in revenue
ΔR = 6.4·3500 − 8·2 500 = 22 400.00 − 20 000 = €2 400.00
Answer
ΔR = €2 400.00
|E| > 1: demand is elastic.
2.Price elasticity of demand
Answer: E = −3.167
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 = 1000 − 20·38 = 240
Point elasticity
dQ/dP = −20
E = (dQ/dP)·P/Q = −20·38/240 = −3.167
Answer
E = −3.167
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · A shortage
Why this is the answer
A binding maximum price raises quantity demanded and lowers quantity supplied, creating excess demand, as with rent control.
Answer
C · A shortage
4.Economics concepts
Answer: A · Private bargaining can reach an efficient outcome regardless of who holds the rights
Why this is the answer
With costless bargaining, parties will negotiate to the efficient level of the externality; who holds the rights only decides who pays whom.
Answer
A · Private bargaining can reach an efficient outcome regardless of who holds the rights
ExamProblems · examproblems.com/courses/microeconomics