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 €25.00 to €19.00, weekly sales change from 100 to 120. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €19.00Q1 = 100Q2 = 120
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −0.8, so Q = A·P^−0.8. At a price of €10, 2 000 units are sold. How many units Q are sold at a price of €13.00?
E = −0.8P1 = €10Q1 = 2 000P2 = €13.00
Q = units
3.Economics conceptsMedium
In the short run, a firm in perfect competition should shut down if the market price is below:
- AAverage fixed cost
- BAverage total cost
- CMarginal revenue
- DAverage variable cost
4.Economics conceptsHard
Under a fixed exchange rate with free capital movement, a country:
- ACannot trade with other countries
- BLoses control of independent monetary policy
- CMust have a budget surplus
- DCan set any interest rate it likes
3Solutions
1.Price elasticity of demand
Answer: E = −0.6667
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
(120 − 100)/((100 + 120)/2) = 20/110 = 0.1818
Relative change in price
(19 − 25)/((25 + 19)/2) = −6/22 = −0.2727
Elasticity
E = 0.1818/−0.2727 = −0.6667
Answer
E = −0.6667
2.Price elasticity of demand
Answer: Q = 1621 units
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.
Ratio of the prices
P2/P1 = 13/10 = 1.3
New quantity
Q = 2 000·1.3−0.8 = 2 000·0.8107 = 1621
Answer
Q = 1621
3.Economics concepts
Answer: D · Average variable cost
Why this is the answer
If price covers average variable cost, producing reduces losses by contributing to fixed costs; below AVC, shutting down loses less.
Answer
D · Average variable cost
4.Economics concepts
Answer: B · Loses control of independent monetary policy
Why this is the answer
A country cannot simultaneously have a fixed exchange rate, free capital flows and an independent monetary policy; it must give up one of the three.
Answer
B · Loses control of independent monetary policy
ExamProblems · examproblems.com/courses/microeconomics