1. The following is a demand schedule for RJ Guitars.

Construct the demand

curve.

Price Quantity Demanded

P4,000 2
P3,500 6
P3,000 10
P2,500 14
P2,000 18

2.   Because of a typhoon in the city, the price of cabbages rose from P60.00 to
P80.00, and the quantity demanded falls from 150 kilos to 100 kilos.
a.     Compute for the price elasticity for this price range.
b.     What is the interpretation of this price elasticity of demand?
c. What happens to the total revenue of sellers when the price of cabbages
increases? 
GIVEN: Price Quantity Demanded

60 PAST 150 PAST

80 PRESENT 100 PRESENT

Solution:

A. Price Elasticity

% Cℎange ∈Quantity demanded

=¿
% Cℎange ∈Price

Q 2− Q1
FORMULA
(Q 2+Q1)/2
x 100

100 −150 −50

% Change in Quantity =
(100+150)/2
to 125
= - 0.4 x100 = - 40 %

80 − 60 20
% Change in Price = (80+ 60)/2 70 = 0.28 x 100 = 28

−40
Elasticity = 28 = 1.42

B. ANSWER:
A change in price results to an equal percentage change in quantity demand.
Elasticity is unitary.

C. ANSWER:

Total Revenue 1 (TR1) = 60 x 150 = 9,000

Total Revenue 2 (TR2) = 80 x 100 = 8,000
When price is increases, total revenue decreases.

3.   The following table shows the daily quantity sold for two (2) products in Brigg's
Warehouse according to the average income of customers.
Past Present
Quantity demanded if income is P15,000 | Quantity demanded if income is P25,000
Product A 20 15
product B 12 18

a.      Calculate and interpret the income elasticity for Product B, if a customer's

income changes from P15,000 to P25,000. (10 points for the solution, 5 points for
interpretation)
b.     Calculate and interpret the income elasticity for Product A, if another customer's
income changes from P15,000 to P25,000. (10 points for the solution, 5 points for
interpretation)

a. ANSWER to Product B
Income elasticity of demand

% Cℎange ∈quantity demanded

Income elasticity¿
% Cℎange ∈Income

Q 2− Q1
Formula (Q 2+Q1)/2 x 100

I 2−I 1
( I 2+ I 1)/2 x 100

18 −12 6
% change in Quantity = (18+12)/2 =¿ 15 = 0.4 x 100 = 40%

25,0 00 −15,000 10,000

% change in income = (25,000+15,000)/2 = 20,000 = 0.5 x 100 = 50%

0.4
Income Elasticity = 0.5 = 0.8

Interpretation:

The elasticity is between 0 and 1 meaning that product B is a normal

necessity.
Quantity demanded increases less proprotionately to income increase.
Normal good have a positive income elasticity of demand.

B. Answer to Product A

% Cℎange ∈quantity demanded

Income elasticity¿
% Cℎange ∈Income

Q 2− Q1
Formula (Q 2+Q1)/2 x 100
 I 2−I 1
( I 2+ I 1)/ 2
x 100

15 −20 −5
% change in Quantity = (15+20)/2 = 17.5 = - 0.28 x 100 = - 28%

25,000 −15,000 10,000

% change in income = (25,000+15,000)/2 = 20,000 = 0.5 x 100 = 50%

−28
Income elasticity = 50 = - 0.56

Interpretation:

The income elasticity is negative implying that the commodity A is an inferior good.
As income rises, the consumers demands less of the product.