Ruiz 1

ASSIGNMENT #2- Microeconomics Course code: BECN 100 Student Name: Samantha Ruiz Professor: Michael Lindsay Date due: March 9, 2011

Ruiz 2 Microeconomics Question # 1- 13 marks a) Calculate Total Revenue for every combination of price and quantity demanded from the demand schedule Product Price 5 4 3 2 1 Quantity Demanded 10 20 30 40 50 Total Revenue 50 80 90 80 50

b) Plot the demand curve between the product price and Quantity demanded c) Then graph the variables total revenue versus quantity demand below the demand curve

Demand Curve
6 Price Product 5 4 3 2 1 0 10 20 30 Quantity Demand 40 50

100 Total Revenue 80 60 40 20 0 10 20 30 Quality Demand 40 50

Ruiz 3 d) Observe the nature of the graph. Then state a generalize relationship between price elasticity and total revenue I have noticed that when the price decreases from 5 dollars to 3 dollars the total revenue increases. Hence, at exactly 3 dollars the total revenue is at its highest peak, but once the price passes the 3 dollar mark and continues to go down in price the total revenue begins to decreases. In other words, total revenue increases when the prices is greater than and equal to3 dollars, and the total revenue decreases when the price is less than 3 dollars. I have also observed that when demand is elastic, price and total revenue move in the opposite direction
and when demand is inelastic, price and total revenue move in the same direction.

Question # 2 - 7 marks How would the following changes in price effect total revenue? That is, would total revenue increase, decline, or remain unchanged? a) b) c) d) e) f) g) Price falls and demand is inelastic, total revenue decreases Price rises and demand is elastic, total revenue decreases Price rises and supply is elastic, total revenue increase Price rises and supply is inelastic, total revenue increase Price rises and demand is inelastic, total revenue increases Price falls and demand is elastic, total revenue increases Price falls and demand is of unit elasticity, total revenue is unchanged

Question # 3 20 Marks The following is a straight-line demand curve that confronts a single firm. (a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of demand at each price using the midpoints formula. (Show all calculations to 2 decimal places) Price $6 5 4 3 2 1 Demanded 1 2 3 4 5 6 (3) Total revenue 6X1= 6 5X2= 10 1.8 4X3= 12 1 3X4= 12 0.56 2X5= 10 0.27 1X6= 6 (4) Coefficient

3.67

Ruiz 4 (b)Describe the character of elasticity across the prices based on the total revenue test and the elasticity coefficient. From my calculations, Demand is elastic in the price range from $6 to $4. Hence, as price fall from $6 to $5, total revenue increases from $6 to $10. As price falls from $5 to $4, total revenue increases from $10 to $12. However, total revenue remains constant at $12 when price falls from $4 to $3 because demand is unitary elastic between those prices. Thus, demand is inelastic from the price range $3 to $1. That is because when price falls from $3 to $2 the total revenue decreases from $12 to $10 and as price falls from $2 to $1 total revenue decreases from $10 to $6. (c) Does a straight-line, down sloping, demand curve have constant elasticity? Yes, or No, and explain. A straight-line, down sloping, demand curve does not have constant elasticity because On the far left of a demand curve, there would be high price and low quantity demanded and on the far right, there will be a low price and high quantity demanded.

Question # 4 10 Marks 1) What are the major determinants of price elasticity of demand? List them. The major determinates of price elasticity of demand are: Substitutes Number of uses Share of the item in the budget Luxury or necessity Time 2) Use these determinants and your own reasoning and state whether demand for each of following products is elastic or inelastic:

the

(a) Bottled water, elastic because water can be substituted by many other liquids such as juice, pop, milk, and ect. (b) Tooth paste; inelastic because it is a necessity to clean and brush teeth in the mornings. Hence, if the price goes up, people will give up other commodities to be able to buy the toothpaste. (c) Crest toothpaste; elastic because if the prise goes up people will most likely switch to a different brand available (d) Ketchup, inelastic (e) Diamond bracelets; the demand for luxuries like this watch are likely to be elastic (f) Microsoft Windows operating system; inelastic