## [MAE]Summary on 11/17/09

**Summary of MAE on 11/17/09**

Answer the question in the books on page 108

Question:

- The Acme Paper Company lowers its price of envelopes (1,000 count) from $6 to $5.40 If its sales increase by 20 percent following the price decrease, what is the elasticity coefficient?
- The demand function for a cola-type soft drink in general is Q=20 – 2P, where Q stands for quantity and P stands for price
- Calculate point elasticity at prices of 5 and 9. Is the demand curve elastic or inelastic at these points?
- Calculate arc elasticity at the interval between P = 5 and P = 6
- At which price would a change in price and quantity result in approximately no change in total revenue? Why?
- The equation for a demand curve has been estimated to be Q=100-10P+0.5Y, which Q is quantity, P is price, and Y is income. Assume P = 7 and Y=50
- Interpret the equation.
- At a price of 7, what is price elasticity?
- At an income level of 50, what is income elasticity?
- Now assume income is 70. What is income elasticity?

Answer:

- Elasticity of Price = Ep

Ep = 20%/-10% = -2

|Ep|=2>1

Demand is elasticity

- a. Point Elasticity

Ep=dQ/dP * P1/Q1

= -2 * 5/10 = -1

**E(5) = -1**

E(9) = -2 * 9/2 =-9

**E(9) =-9**

b. Arc Elasticity

Ep = {(Q2-Q1)/[(Q1+Q2)/2]}/{(P2-P1)/[(P1+P2)/2]}

= (-2/9)/(2/11)=-1.22

c. P = $5 => |E(5)|=1

- a. Q = 100-7*10+0.5*50 = 55

b. Ep = ?

Ep = -10 * 7/55 = -70/55 = -1.27

c. Ey = ?

Ey= 0.5*50/55 = 50/110=0.45

d.E(8)=-10*8/55=-1.45

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