Econ 103 Spring 2002 ELASTICITY EXERCISES (answers are listed below question) 1.

. The following is a demand schedule for jogging shoes: Price per Pair $140 120 100 80 60 40 20 Quantity demanded (pairs per day) 2 6 10 14 18 22 26

a. Draw the demand curve on the graph below.

140 120 100 80 60 40 20 D1 6 10 14 18 22 26

b. Calculate the arc elasticity coefficient as price decreases from $120 to $100, $80 to $60, and $60 to $40.

c. What happens to the coefficient of elasticity as P decreases along the demand curve? What happens to TR as P decreases? Explain the relationship between P, TR, and elasticity. Along the demand curve, as P decreases, the elasticity coefficient varies.

As price decreases, Total Revenue increases when demand is price elastic, then Total Revenue decreases when demand becomes price inelastic. Relationship between P, TR, and elasticity is the following: *When E>1, as P decreases, TR increases. *When E=1, as P decreases, TR stays the same and is at maximum. *When E<1, as P decreases, TR decreases. 2. Suppose that, because of the impact of Hurricane Mitch in Central America, the price of bananas rises from $0.50 to $1.00 per pound and the quantity demanded falls from 1000 pounds to 400 pounds. a. Calculate the midpoints elasticity of demand for bananas in this price range.

b. Are bananas elastic, unitary elastic, or inelastic in this price range?

c. What is the interpretation of that price elasticity of demand? d. If the price of bananas were to increase by 15 percent, what would be the percentage change in the quantity demanded? e. If the price of bananas were to increase by 20 percent, what would be the percentage change in the quantity demanded?

f. What happens to total revenue for banana sellers when the price of bananas increases? Explain your answer.

g. Give 2 factors that would cause bananas to have this elasticity of demand calculated in part (a) above. 1) existence of other fruits that are good substitutes. 2) Banana is not a necessity.